In July 2023, the Securities and Exchange Board of India (SEBI) issued regulatory guidelines and a circular for mutual funds. They introduced a separate sub-category for what they termed ‘ESG’ investments. This means investing ethically and responsibly, rather than simply for profit. It is also called ‘ethical finance’. Leading the revolution for ethical finance and ESG investments are women, not just in India, but across the world.
But first, let’s take a look at what ethical finance is. ‘This is an umbrella term that refers to finance and investments that factor in more than just monetary returns,’ explains banker Jaideep Krishna. ‘These investments consider a four-pronged approach, with finance being just one prong. The other factors are Environmental, Social, and Governance – which are clubbed together and called ESG factors. Ethical finance is when investors keep all these factors in mind rather than just profit. They expect institutions and even retailers to align with their values, providing a positive environmental and social impact, and also governing with the principles of business ethics. All these factors have to be measurable and transparent.’
According to a UBS study titled ‘Women on Purpose’, 79 per cent of female investors made sure their investments corresponded to their values. Of these, 47 per cent already had investments that were based solely on ESG criteria. This did not mean that they were compromising on their returns. On the contrary, three out of four women surveyed expected their ESG investments to generate the same or even higher returns than traditional investments that didn’t consider these factors.
‘With ethical finance, the institution supports environmental enhancement, reducing carbon emissions, carbon footprint and supporting energy efficient solutions,’ explains Jaideep Krishna. ‘This means companies that use renewable energy sources, and green architecture, are responsible for lesser pollution and e-waste, and use lesser resources such as water, and toxic raw materials. Social factors include providing credit and funding without any ethnicity or gender discrimination, and ensuring women from all backgrounds have access to the same financial opportunities as men. It also means focussing on creating products and services that keep the well-being and security of workers and consumers in mind. Companies need to focus on equity, inclusion, and community development as well. Fair wages and employee engagement The Governance in ESG is all about how a company behaves with regard to ownership and control, compliance, practices for preventing corruption, and so on. In short, investors don’t just want to know how much money a company is making – they want to know how that money is being made!’
A report by the World Economic Forum in June 2024 stated that beyond financial returns, women were twice as likely to incorporate ESG into their investing activities. In fact, Green Money Journal published findings that social and environmental issues are important to 90 per cent of millennial women and can influence their decision-making. At the other end, a study by S&P Global Market Intelligence as far back as 2021 (close on the heels of the Covid-19 pandemic), found that firms with female CFOs performed better in the stock market and financially when compared to the market average. The same research also said that firms with high gender diversity on their board of directors have been more profitable than those with minimal gender diversity.
Although the terminology is recent, ESG or ethical finance is not a new concept. As far back as the 1980s, a movement called EHS (environment, health, safety) was coined by the United Nations, trying to include these aspects with economic growth. In the 1990s, this became ‘corporate sustainability’ and in the early ‘00s, it became ‘corporate social responsibility’. In the late 2010s, ESG emerged as companies tried to combine profits with positive impact.
‘There are many vehicles for investment, such as green bonds, also known as climate bonds,’ says Jaideep. ‘These are securities issued by a company for financing projects that contribute positively to the environment in some way. These could include projects that focus on renewable energy, pollution control, green building, clean transportation, and so on. However, investing ethically also requires some amount of research and judgement. You have to do your due diligence. For instance, a company may manufacture solar panels. But in the process if they’re generating excessive waste and not using ethical manufacturing methods, then that’s a no-no. Choose funds that have a solid parent group behind them, and align with your own ethical goals. This is positive screening. You can also do a negative screening and eliminate ‘sin stocks’ – alcohol, tobacco, weapons, and gambling, as well as those that deal in fossil fuels or plastics. Consider other, more personal factors – do you want to invest in a company that tests on animals? Or doesn’t promote Fairtrade?’
At a women’s college in Chennai, the Department of Commerce Accounting and Finance hosted an event this year, where investment management leader Yaseen Sahar delivered the keynote address on ‘The Ethical Emporium: Where Money Meets Morals’. He stated that 70 per cent of investors today factor ethics into their financial decisions, with ESG assets projected to reach $50 trillion by 2025. He said, ‘Ethical finance isn’t just about avoiding negative impacts it’s about making responsible choices that lead to positive social outcomes.’