Value for money: The changing dynamics of ethical investing
In June 2020, e-tailer Amazon set up a $2 billion fund for investments in technologies that’ll help companies reduce carbon footprint and become net-zero in carbon output. The fund is another step the company has taken after experiencing employee dissatisfaction over its heavy environmental footprint. Amazon also launched a new website, where anyone, including investors, customers, and employees can track the company’s sustainability commitment progress.
“We’ve decided to use our size and scale to make a difference,” Jeff Bezos, founder of the e-commerce giant, said. “If a company with as much physical infrastructure as Amazon—which delivers more than 10 billion items a year—can meet the Paris Agreement 10 years early, then any company can.”
Tech giant Google, too, announced in 2020 its plans to increase the global wind and solar energy portfolio by more than 40% to 5,500 megawatts (MW). This is said to be the biggest corporate purchase of renewable energy.
These are examples of companies attempting to portray themselves as entities that are socially invested.
Investors all over the world are no longer passive participants. With better and faster access to information, corporate, economic, social, and political events have an almost immediate impact on investor perception and the resultant investor behavior. In addition to this, consumer, as well as employee behaviour, has also changed, leading to an expansion in the traditional meaning of ethical investing.
Originally, the meaning of ethical investing was related to not investing in ‘sin’ companies or stocks, i.e., businesses that included alcohol, gambling, or weapons. But the term has a much broader meaning now and no company, however large, can afford to ignore investor sentiment in this regard.
Industries that have a positive impact in areas such as sustainable energy, recycling, pollution control, healthcare, gender diversity, education, and others resonate well with socially conscious investors. Of course, along with giving returns. More and more investors want to put their money in stocks or funds that not only show a profit but are also in line with their social values.
Given the broader definition of ethical investing, new related terms have emerged — socially responsible investing (SRI), impact investing, sustainable investing, green investing, and environmental, social, and governance (ESG). ESG, especially, has become an influencing factor in companies’ capital expenditure strategy and bottomline.
Indian companies, too, are cognizant of the need to communicate positive impact. Indian startup Mama Earth makes natural personal care products, which it advertises on TV commercials. Nothing unusual in that. What’s different is that the commercials end with “…aur ped bhi ugate hain (…and they plant trees too).” Apart from this, the company plants a tree for every order placed on their website.
The Delhi-based company is not the only one that is actively communicating its social ventures. Over the years, banks, steel companies, FMCG majors and many more have been putting forth their socially relevant programmes. More recently, the popular beverage Thums Up has been airing two TV commercials — one features actor Salman Khan and focuses on the drink’s refreshing taste while the other features struggle narratives of Indian sportspersons.
Shiv Nadar, the founder of the $10.5 billion tech giant HCL Technologies and the Shiv Nadar Foundation, said, “I admire companies that give back to communities. It is absolutely essential for organisations to watch, mitigate, and improve their impact on the environment, people, communities, their health, and overall well-being. This is a necessary condition, not a sufficient condition.”
From Fringe to Mainstream
Through what lens do investors judge companies when they are looking for ethical investing? There are various ways to go about this. Some include only those investments that have a positive impact and some exclude negative-impact investments. Some use both methods. Investopedia explains that ESG looks at the company’s environmental, social, and governance practices, alongside more traditional financial measures, while SRI involves actively removing or choosing investments based on specific ethical guidelines. Impact investing looks to help a business complete a project or develop a programme or do something positive to benefit society.
With climate change being a matter of serious concern for everyone and even becoming a part of political promises, ESG funds are likely to get a further boost. ESG funds captured $51.1 billion of net new money from investors in 2020, a record and more than double the prior year, according to Morningstar. This was the fifth consecutive annual record. In 2019, investors funnelled roughly $21 billion into ESG funds.
According to the 2020 survey by the U.S. Forum for Sustainable and Responsible Investment, SRI and impact investing accounted for more than $1 out of every $3 under professional management in the US.
Such evidence clearly points out that ethical investing is no longer a fringe trend but a mainstream factor that is likely to gain more investors in the future as well.