Emerging Trends in Socially Responsible Investing
November 23, 2020 • DE Energy
By Shivani Kalbande, Analyst, Distributed Energy
The scope for socially responsible investing (SRI) is being influenced by demographic shifts, climate change, and technological advancement. A culmination of these factors has resulted in investors and millennials seeking out transparency in investment processes and demanding investment services focused on sustainable growth and development. The new generation of financially literate investors recognizes the financial impacts on values they wish to promote and are consequently making informed decisions on their portfolio selection without having to compromise on the overall performance of the portfolio. By applying an SRI framework to their financial decision-making process, investors are able to evaluate which companies to invest with or avoid based on long-term financial risk and overall sustainability outlook and accordingly, rebalance their portfolios.
The graph below illustrates some of the factors that can play a key role in positively impacting the growth of SRI in the future.
SRI promotes any investment that is believed to have a positive and long-lasting impact on humanity. Further developments in SRI have brought to life(Environmental, Social, and Governance)investing, which is one of the more promising branches of this movement. ESG builds on the existing framework of SRI but takes it one step further by considering additional impacts on the environment and society, as well as the governance of the company.
ESG investing helps investors apply a more rigorous and disciplined evaluation of one or more of the below considerations when making investment decisions:
- Environmental themes – such as investing in companies that are responding to consumer demand for sustainable practices i.e. clean energy adoption in operational practices or other means of reducing their overcall ecological footprint
- Social themes – such as investing in companies committed to a diverse and inclusive workplace i.e. gender equality
- Governance themes – such as investing in companies committed to diverse board composition, strong oversight, and shareholder-friendly policies
Different ESG investors follow different trends in SRI investing. For example, some ESG investors are environmentally focused and prefer to deploy their investments into clean technology or companies focused on promoting sustainable practices. This includes the likes of companies such as Distributed Energy, which are allowing investors with a mandate to invest in renewable energy projects in developing countries. Other investors may want to champion social justice and seek out companies that promote diversity, economic equality, and other human rights issues. In this case, the ESG investors are more focused on companies’ management practices and evaluate the recruitment/employment practices, overall job satisfaction, and providing work/life balance to employees. In a nutshell, the growth of these investment options has given investors the flexibility in identifying and partnering with companies/fund managers that have a social mandate that fits with values that resonate strongly with them.
Developing countries, such as India are also beginning to witness more action in this investment space. There are several asset management companies based in the country that have launched dedicated ESG funds to promote sustainable development. However, this form of investing is still in its early days in India, accounting for only 0.1% of global SRI deployed assets.
While India still lags behind global standards of SRI growth, the regulatory framework on corporate governance, coupled with several government initiatives to protect the environment, and a rising sense of corporate responsibility, are all paving the way for the future of ESG investing in the country. To further accelerate this movement, it’s now up to the likes of institutional investors, along with government-led financial and policy support, to pave the way and pressure companies to ensure climate change is in the front and center of their business decisions.