Due Diligence. Invest in companies that do good

Investors put their capital at risk to generate returns that can meet their goals. However, many investors are now choosing to make investments that also satisfy their personal moral code. They are increasingly investing in companies and assets that make a positive difference or do good or, may be, just abstain from doing bad. Does this mean that to invest ethically one needs to compromise on returns? The short answer is No!

Ethical investing gratifies an individual’s moral needs and basically involves making socially-responsible decisions. It can broadly be classified into:

ESG investin g: This involves investing in companies that satisfy values related to “environmental, social and governance” related causes. Investors looking at ESG investing would invest in companies that adhere to certain standards related to environment protection, consumer protection, religious beliefs and human rights.

Shareholder advocacy : Investors can choose to exercise their rights as shareholders and pro-actively influence corporate decisions that are likely to have a meaningful impact on business practices and society.

Community investing: There is a considerable part of the population that is under-served by large financial institutions. Through community investing, capital is channelised into segments of society that have the need for but do not have access to low-interest loans.

The first step is to examine the causes that you are most passionate about and then choose from the available investment options. Investors can apply positive, negative or restricted screens to filter these options further. A negative screen involves actively avoiding certain kinds of companies. This could be because of the sector that they operate in: for example, tobacco; or for any other moral reason.

A positive screen, on the other hand, involves seeking out companies that promote or are actively involved in causes that you as an investor support. A restricted screen usually helps filter large, diversified corporations that are involved in multiple businesses, some of which might meet your ethical investing requirements and some might not. The last step before making the investment is to ensure that the investments align with your long-term financial plan.

Intuitively, the best way to invest ethically would be to filter out companies that meet your moral requirements and support the causes that are important to you. However, this can be time-consuming and requires in-depth research. A better alternative is to invest in indices or funds that invest in such companies. Environmentally-conscious investors can choose the S&P BSE Greenex or the S&P BSE Carbonex. While the former comprises companies that follow energy-efficient practices, the latter selects firms based on how well they deal with risks arising from climate change. The S&P BSE Greenex has generated year-to-date (YTD) returns of 12.88 per cent and yielded 5.09 per cent over the last three years. The S&P BSE Carbonex, on the other hand, has generated YTD returns of 22.92 per cent and yielded 9.86 per cent over the last three years.

Another form of ethical investing that is catching on is Shariah-compliant investing which filters companies based on Islamic law. It precludes companies that both earn or pay interest and those involved in advertising and media, alcohol, tobacco, and gambling, among others. The S&P BSE 500 Shariah has generated YTD returns of 15.63 per cent and yielded 8.30 per cent over the last three years.

Investors are becoming increasingly conscious about the type of companies they invest in and the numbers indicate that they can choose to follow ethical investing without having to compromise on returns.

Data source for returns: www.us.spindices.com

The writer is CEO of Edelweiss Asset Management. The views are personal

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