It's time to make value-based investing sexy

It's a misconception that a better bottom line comes at the cost of compromising on ESG values, and evidence of this is available globally as well as in India

Published: 01, Jul 2019

Nithin Sasikumar is the Co-Founder of Investography, a financial wellness company based in Bengaluru. He can be reached at nithin@investography.in

Image: Shutterstock
Image: Shutterstock

Can your assets be invested in ways that value and respect the environment, animals, people? Impact investing, socially responsible investing, ethical investing, conscious capitalism—call it what you may. Impact investments, as defined by the Global Impact Investors Network (GIIN), are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. Even though this concept was not new in 2007, the Rockefeller Foundation coined the term ‘impact investing’ at a gathering in Italy; it’s what they call double bottom line investing—for financial and social return.

People want their portfolios to be aligned with their beliefs and passions, and care more about companies creating a positive impact. For the purposes of this article, since it’s an all-encompassing feature I’m going to call it values-based investing since everyone has their own value system for investing responsibly. For some investors, it could be investing only in companies that are environmentally conscious, or in socially inclusive businesses with hiring practices that promote diversity (women, people of colour) and inclusivity (LGBTQ), or they may look at the median (not average) pay in the company to consider fair treatment of employees or it could be in companies that are not linked to animal cruelty in any way.

In 1970, Milton Friedman (an American free- market theory economist and Nobel prize winner) wrote an article in the New York Times titled ‘The social responsibility of business is to increase its profits’. As a proponent of free market capitalism, he argued against socially responsible activities that didn’t add to the company’s top line and said that economic freedom would be compromised if shareholders aren’t able to decide the ways in which money would be spent. And I’m pretty sure we’ve been taught something along those lines during our business and economics classes at school or at university. But we’ve come a long way since Friedman’s time, and I’m glad we’ve done so, because we and the future generations bear the cost of profits as the sole purpose of business. This could be in the form of air and water pollution, plastic and other environmental pollution, unfair and discriminatory hiring practices. It isn’t just about profit maximisation for stockholders, but about value maximisation. And if that isn’t clear, the Merriam-Webster dictionary defines a stockholders as ‘an owner of corporate stock’ and a stakeholder as ‘one who is involved in or affected by a course of action’. So, all stockholders are also stakeholders but all stakeholders are not stockholders.

For a movement that’s often labelled as an emerging asset class and with values-based investors still being in minority, can they really move the needle much? If the new research is right, established norms can be challenged effectively if the minority can reach a critical mass of 25 percent. If we’re committed to the idea, it can become the primary opinion eventually. But it’s not just consumers and businesses that have to bring the change, it’s also the government. Most governments like to be seen as business friendly, and in the course of those things, pay far less attention to environmental issues than they should.

Since values-based investing isn’t philanthropic, it begs the question if such a strategy reduces returns? While the misconceptions remain, a better bottom line does not have to come at the cost of compromising on ESG values. And this is seen both globally as well as in India. The Vanguard FTSE Social Index Fund which invests in stocks that have been screened for companies meeting certain social criteria has outperformed the broader S&P 500 index in the US across time periods. And so has the MSCI India ESG Leaders Index (35 stocks), which has beaten the MSCI India Index 78 stocks) quite handsomely.

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While the sector is still in its infancy, the signs are encouraging. And millennials are leading the change. To create portfolios and be investing in companies with shared values is a way of life, not a movement. Steven D. Levitt and Stephen J. Dubner wrote in Freakonomics, ‘morality, it could be argued represents the way that people would like the world to work—whereas economics represents how it actually does work.’ While it may be true, it’s time to introduce moral economics then.

Let’s face it, values-based investing is the new sexy.

The author is Co-Founder of Investography, a financial wellness company based in Bengaluru.

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