The developing world is moving towards the exploitation of its own resources and this has been a continuous concern for global environmentalists.
However now the effects of excessive exploitation are visible in large and small economies and thus governments are also hoping for the sustainability factor.
Sustainability in a direct language is using resources whether natural, financial, manmade or minerals in an effective manner. Sustainability thus prevents utilization.
How Unsustainable World Can Affect The Financial Sector?
Being a finance and investment enthusiast, you would think that sustainability is a matter of the environment and not finance.
However, as sustainability affects the power of firms and companies to the extent they can use resources or bring forward production, it has direct implications on finance.
Profits get limited, production capacities are limited by the governments and thus limiting revenues.
Of course revenue, streams and social responsibility of firms will be against their production set. Businesses’ investment decisions and rates of return would change drastically.
Thus your investment decisions would be framed accordingly!
What Do You Mean By Sustainable Finance?
Sustainable finance in its core terms focuses on investment decisions made by firms or individuals after keeping a check on three sustainability factors. These factors are environmental, social and governance considerations or to say ESG.
This means when investment decisions are influenced by ESG, the decisions generally pave the way towards investment in sectors that help in the development of environmental and social goals.
Returns from investing smartly in sustainable finance will not only impact your portfolio but serve a bigger purpose.
The world’s share of sustainable finance is looked over by the world bank. It works on using data resources and then translating them into meaningful results. This helps in keeping track of what type of goals countries across the world intend to invest in.
ESG and sustainable finance are linked but not the exact same. ESG is anything that concerns the three criteria however finance is targeted towards investment in the sectors giving returns based on ESG.
Sustainable finance is a long-term financing decision since sustainability achievement in all three consideration factors takes due time to establish. It is an even established fact that consumers and investors are now being more aware.
The change in the market economy is an evident rollout of sustainable finance. You would have heard “paraben-free”, “cruelty-free”, “xyz% revenue goes for social cause” etc. Such tags line are used by brands nowadays to attract consumers and investors.
And as said, consumers and investors being aware are certainly observed to use the products of sustainable brands and invest in brands working towards ESG goals.
What Does ESG Consist Of?
The ESG consideration while working on sustainable finance consists of subgroups of activities. Sustainable finance will help you focus on every aspect of investment.
Since the world is moving towards sustainable solutions, your present investment in sustainable financing options can get you a very high rate of return in future.
Advantages Of Sustainable Finance
More investors are choosing their investments based on a set of values-based standards. However, it is sensible to look into an investment that can not only generate a healthy return but also aligns with basic beliefs, whether investors envision a healthier planet for their grandchildren or just want to make the world a better place right now.
The industry of sustainable finance has peaked at up to 4 trillion USD even when the world was in jail for the COVID-19 pandemic.
This is evidence of how investment decisions are affected by acts of social change. Chairman and CEO of BlackRock, Larry Frink has facialized and observed that every eight out of ten ESG funds perform better than the returns from non-ESG funds.
This indicates that the future of sustainable finance is brighter than traditional investment plans. Therefore investors should take the first tap on opportunities and reach wider fund benefits via sustainable finance investment.
Why Is Sustainable Finance Important?
Sustainable finance is advantageous but it is also important. This implies that it is not just to build a better financial asset for the world but also to safeguard the globe.
- A moral sense of action and our concerns towards global social and environmental issues makes it of the utmost importance to take care of suitable solutions.
These solutions are not just about using scientific techniques to save the exploitation of resources and societal norms but also need psychological changes.
- As governments and authorities all around the world focus on sustainable growth, businesses are obliged to work accordingly. However, if they fail to commit to the policy actions, penalties are due their way. This disregards the returns from investments and thus lowers future prospects.
Therefore sustainable finance is important as it is anticipated that investors will want to see evidence from the target firms that they have or atleast evaluated the environmental risks and developed strategies to lessen their consequences.
How To Strategize Your Sustainable Finance Investment?
Talking so much about sustainable finance, it is only relevant when you as an investor can benefit from it. The procedure to invest in assets that follow ESG and sustainable finance criteria is the same as to invest in other assets. This includes stocks, mutual funds or exchange-traded funds. This is only possible by driving investment strategies ad making portfolio plans by keeping in mind the below-mentioned factors:
Invest in environmentally friendly companies
Now we know environmentally friendly companies are those who work towards saving the environment from exploitation or the ones whose products are completely environment friendly.
Being a common man, you can either plan to invest in mutual funds that aim towards sustainable finance and be free from the hectic analysis.
Another way around this can be to work on fundamental analysis of companies having environmental goals and find industries that have planned ecological causes in their reports.
Since these companies are working towards ESG goals, the stock values and revenue will likely pick the pace up and the futuristic approach will help your portfolio grow.
Some top Indian companies that performed enormously well in environmental responsibilities are:
- Godrej consumer products limited spent nearly ₹ 34 crores on CSR
- Infosys limited spent ₹ 325 crores for CSR contribution
- Wipro Limited has contributed nearly ₹ 251 crores in sustainable business practices
Keep a track of companies’ social ethics
Companies having strong social ethics, like equality in gender, caste, and region and that work toward social change.
It is not necessary to target only the companies that sully work towards social change but it is vital to target companies that promote the social cause by their goals and aims.
The working environment and side-line campaigns of companies being equality and equity-driven are essential for ESG to work.
Stocks 0f such kind of company’s are generally highly valued since a happy place to work gives out a better revenue stream. The campaigns set the popularity towards the products and services and thus investing ROI boosts up.
Two of India’s leading Companies among the world’s top scores in social responsibility:
- Tata Consultancy Services Ltd with a score of 97.52
- Nestle India Ltd with a score of 94.18
Look for companies with strong governance
This is essential even without looking at the ESG since value investing involves making decisions based on the quality of the company’s leaders or promoters.
They have strong power to influence the work ethic and prospects of the company. Thus it is important to know the governance mechanism and the people working for it.
Sustainable finance can be directed towards the company stocks if the governance mechanism is in favor of the goals towards ESG.
However, one implication of sustainable finance in value investing is to look for profits with sustainability. This essentially means, the returns might be slow but will be long-lasting and efficient.
The strongest companies in India that made it into the top 100 companies with strong corporate governance are:
- Dr.Reddy’s Laboratories Ltd
- Infosys limited
- Indian Hotels Company Ltd
Capital markets and sustainable finance
Capital markets including mutual funds and stock market have seen enormous investment in ESG-stipulated stocks. Companies following ESG strategies to maintain their reputation in the market have a fairly increasing number of investors.
According to UNCTAD (United Nations Conference on Trade and Development), the value of investment products with a sustainability focus on the global capital markets reached $3.2 trillion in 2020, an increase of more than 80% from 2019.
One should invest in companies working on ESG goals and framing fundamental policies for a sustainable environment.
Being an aware investor, one can choose stocks whose parent companies are focusing towards goals of fewer carbon footprints, working on renewable energy sources and having stringent equity and equality concerns like giving a greater role to women.
Such stocks are high-valued and long-term yielding.
Safer investments can be done via ETF or mutual funds having ESG goals. The top 3 ESG companies are:
- Coca-cola with an ESG score of 67.29
- Pepsico with an ESG score of 65.48
- Mondelez International with an ESG score of 64.92
Bonds market strategies
Bond market is a strong source of debt instruments used to generate ESG returns.
India has been seen to have the second largest investors over the years moving towards sustainable bond options.
Green bonds function similarly to conventional bonds but with one important distinction i.e. the funds obtained from investors are only used for finance initiatives that have a good influence on the environment, such as renewable energy.
Social bonds are bonds that support initiatives that improve society such as those aimed at preventing or reversing hunger or eradicating poverty. Sustainability bonds are activity-based securities designed to fund or refinance projects that combine environmental and social concerns.
As activity-based loans, green loans function similarly to green bonds but are available only on the private market. Peer-to-peer lending or commercial lenders are the main sources of green financing.
These above-mentioned debt instruments are based on ESG and thus create the possibility of better long-term returns.
Examples of green bonds in India:
- State bank of India with an amount bearing of $650 million
- Adani green energy limited amounting a $ 750 million
- ACME solar at the amount of $334 million
Sustainable finance is emerging as a critical tool in addressing the pressing global challenges of climate change, social inequality and environmental degradation. It encourages responsible investment practices that prioritize long-term value creation while considering the impact on the planet and society. The growing adoption of sustainable finance principles by investors, businesses and policymakers demonstrates a collective commitment towards a more sustainable future.
However continued efforts are required to enhance transparency, measurement and reporting standards to ensure the effectiveness and accountability of sustainable finance initiatives.