With the world increasingly facing natural disasters, it is small wonder many institutional investors consider climate as an important factor when taking investment decisions. Here, we discuss whether environment factors should be integrated into your goal-based investments.
Climate risk refers to the significant changes in climate that can have adverse economic implications. So, companies causing adverse impact on climate can have negative implications on financial performance. On the positive side, companies that adopt clean technologies could be rewarded by the investors. This is broadly true for firms embracing Environment, Social and Governance (ESG) factors.
The developed world has vowed to bring greenhouse gas (GHG) emissions to sustainable levels by 2050 to prevent irreversible damage to the environment. Translating this and other global initiatives into investment decisions, financial markets could consistently assign higher valuations to companies that maintain high level of ESG compliance. You can consider investments in such firms through ESG-dedicated equity funds. These are funds that invest in companies forming part of an ESG Index. NSE, for instance, has the Nifty100 ESG Index which reflects the performance of companies in the Nifty 100 Index with weights based on ESG scores.
Concepts could take time to catch on. Europe has been a pioneer in ESG norms with some countries initiating ESG investment mandates before the concept caught on at a corporate level in some non-European countries.
That said, ESG as a concept is not new to India. SEBI requires top 1,000 listed companies to issue Business Responsibility and Sustainability Report that includes ESG concepts in its disclosures. India also has a green bond market, proceeds of which are used to fund renewable energy projects. Whether ESG investing will catch on in India is moot; institutional investors must initiate compelling ESG mandates before such investments becomes mainstream. That means it would be appropriate to keep ESG investments outside of intermediate goal-based portfolios till time such investments gain traction.
You could explore ESG investments as part of legacy portfolio (wealth for children after your lifetime) or for parking surplus savings. You would have then achieved a two-fold objective — your contribution to protect the environment as well as creating wealth for your family.
(The author offers training programmes for individuals to manage their personal investments)