Finance, Sustainability and a Summer Fling

In May 2020, after having exhausted almost all major hobbies that I had always wanted to explore, be it Cooking, Driving, learning Mandarin, or revising the Harmonium, I decided to delve into something that’s conventionally more productive. I decided to try Finance. Now, I always knew a few things about markets, financial statements, and the different domains within the industry, but with the mammoth of a field that Finance is, there was always some room to explore. So I signed up for a couple of fundamental courses to brush up on some topics and boy, was I hooked! After spending a couple of more months trying to cook and drive and learn Mandarin, and reading bits and pieces of market-related news occasionally, it was finally time to prepare for a forthcoming internship season.

For me, the starting point was to decide on the sector of my interest. If you’ve read any of my previous blogs, you would know how much I love Sustainability (read this). Meanwhile, I had also started to develop feelings for Finance and this summer fling was getting difficult to detach from. I felt like a cheating fiancé who’s falling for the hot new chick and as I inched closer to the resume submission deadline, which was the metaphorical wedding day, I was only getting more confused. After around a week of intense research, I finally discovered something that was neither Finance nor Sustainability, but I felt like I had found my true match. It was Impact Investing.

Creating a positive environmental impact, and even social impact, for that matter, is often seen as an expensive affair (no pun intended) that requires businesses to compromise on profits. Well, I used to believe the same until I first discovered Impact Investing and then went on to learn about all the different ways through which Finance can create positive social and environmental impact while making money at the same time. So without boring you any further about my love life, here are the different ways you can enjoy the adrenaline of Finance along with the satisfaction of Impact:

Before we start, what’s key to note here is that there are different levels of investing through which one can achieve varying degrees of impact and returns. The tussle for monetary returns on investment and the environmental and social impact may not be completely untrue. Also, the terms mentioned below are often inter-used and have no set definitions (or at least, none that I ever came across).

Environmental Social and Governance based Investing (ESG) - ESG investing, as the name suggests, takes into account the environmental, social, and governance-related risks of an investment. ESG analysis assesses the potential risks/opportunities in a business that is specific to its environmental and social impact and the internal governance of the company. This analysis aids the technical analysis that is used for making investments. The market currently lacks a standard ESG framework but it typically considers factors such as energy consumption, climate-related risks, health and safety, workplace diversity, transparency, and disclosure, etc. A simplified example of this theme of investing can be a hotel situated adjacent to a city’s coastline. With the threat of rising sea levels, the hotel has high chances of being non-operational for a few months during the year and therefore the revenues are likely to be lesser than what the technical analysis forecasts. This, therefore, is seen as a risk. Historically, companies with a good ESG score have been observed to be less risky and have given better returns. With climate risks getting more and more apparent and increasing understanding for the need of workplaces to be more diverse and inclusive, ESG risks/opportunities are getting more and more mainstream.

Socially Responsible Investing (SRI) - This type of investing is an extension to ESG investing where the investor actively channels money into ethical businesses and divests from unethical businesses. Companies are classified based on the social responsibility of their products, technologies, and services, and investment decisions are made based on whether or not the business aligns with the investor’s ethics. Unlike ESG investing, which only applies an ESG based framework for risk/opportunity investment, SRI uses the ESG framework to screen companies for investment. An example of this theme of investing could be not investing in an oil and gas company or not investing in a firearms company because the product goes against the investor’s value system.

Impact Investing - Impact-focused investing goes one step ahead of socially responsible investing and invests only into businesses that have a proven positive environmental and/or social impact. Its purpose is to channel money into impact creation and make a virtuous use of capital, without compromising on monetary returns. An example of this theme of investing could be investing in a tech startup that cleans plastic from the oceans or a for-profit microfinance institution working for marginalized communities.

Venture Philanthropy - This category of investing is very similar to impact investing and is often considered a subset of the same. Essentially, venture philanthropy is an impact-focused investing that works exclusively with social enterprises. An example of this could be a healthcare startup that offers its services in rural areas. Although the businesses may not be scalable or generating high revenues, the impact generation is high. The goal of this theme investing is to channel capital for the under-served causes.

So these are the 4 broad categories of investing for good. As stated earlier, these terms have no set definition and the manner of investing totally depends on the investor’s discretion and commitment. A large number of banks and firms have also been found to greenwash their investments by designing skewed investment frameworks or paying little heed to the ESG related risks, in spite of promising otherwise. Regardless, a key point to note is that despite the pandemic, this sector has witnessed explosive growth in the past year and it's only slated to grow further. A year of pandemic-induced lockdowns, massive protests against racial inequality in the USA, and the looming threats of climate change are believed to be some of the main causes behind this huge boom.