As the world increasingly faces natural disasters, it’s no wonder that many institutional investors consider the climate an important factor when making investment decisions. Here we discuss whether environmental factors should be incorporated into your goal-based investments.

Climate risk refers to significant changes in climate that can have negative economic impacts. Thus, companies with a negative impact on the climate can have negative implications on financial performance. On the positive side, companies that adopt clean technologies could be rewarded by investors. This is generally true for companies that embrace environmental, social and governance (ESG) factors.

The developed world is committed to reducing greenhouse gas (GHG) emissions to sustainable levels by 2050 to avoid irreversible damage to the environment. By translating this and other global initiatives into investment decisions, financial markets could consistently assign higher valuations to companies that maintain a high level of ESG compliance. You can consider investing in these companies through dedicated ESG equity funds. These are funds that invest in companies that are part of an ESG index. NSE, for example, has the Nifty100 ESG Index which mirrors the performance of companies in the Nifty 100 Index with weightings based on ESG scores.

Conclusion

Concepts may take time to sink in. Europe has been a pioneer in ESG standards, with some countries launching ESG investment mandates before the concept spread to the corporate level in some non-European countries.

That said, ESG as a concept is not new to India. SEBI requires the 1,000 largest listed companies to publish a corporate responsibility and sustainability report that includes ESG concepts in its disclosures. India also has a green bond market, the proceeds of which are used to finance renewable energy projects. Whether ESG investing is spreading in India is debatable; institutional investors need to launch compelling ESG mandates before these investments become mainstream. This means that it would be appropriate to keep ESG investments out of goal-based interim portfolios until such investments gain traction.

You can explore ESG investing as part of an inherited portfolio (wealth for children after your life) or for parking surplus savings. You would then have achieved a double objective: your contribution to the protection of the environment as well as the creation of wealth for your family.

(The author offers training programs for individuals to manage their personal investments)