Responsible capital in the era of sustainability

Investors are increasingly seeking opportunities that not only yield financial returns but also positively impact our planet and society. This proactive approach extends to sectors like renewable energy and clean technology, where sustainable innovations are driving both economic growth and environmental sustainability. Likewise, investments in affordable housing and healthcare contribute to tangible social benefits, fostering more equitable and healthy communities. These contribute to a more sustainable and responsible future.

The rise of sustainable finance marks a significant stride towards aligning financial markets with broader societal objectives. Financial instruments and services tailored to foster responsible capital allocation, such as green bonds, social bonds, sustainability-linked loans, mutual funds, and exchange-traded funds (ETFs), are increasingly instrumental in channeling investment toward environmentally and socially sustainable endeavours. Assets allocated to ESG-focused ETF funds surged from $5 billion in 2006 to $391 billion in 2021. This evolution is not merely a trend; it's an essential facet of our financial future. Sustainable finance is a growing practice and will potentially shape the investment landscape in the years to come.

Another criterion for making responsible investments is aligning the portfolio with personal ethics and global concerns. It involves avoiding investments in industries such as tobacco, weapons, alcohol, and other harmful practices. As of a 2023 survey, a substantial 50% of professional investors worldwide intend to amplify their allocation to socially responsible investments in the coming year. Furthermore, shareholders nowadays are also taking initiatives to drive positive changes in companies' sustainability practices. It includes thoughtful actions such as filing shareholder resolutions and participating in ESG-related votes during annual meetings, thereby exerting direct influence on corporate behaviour and contributing to the broader shift towards responsible capital.

Regulatory boards in many regions drive responsible capital allocation using tools like tax incentives, stringent reporting, performance-based rewards, and sustainability standards. In 2021, SEBI took a notable step by replacing the Business Responsibility Report (BRR) with the Business Responsibility and Sustainability Report (BRSR) for the fiscal year 2022–2023. This mandates the top 1,000 listed entities to include a BRSR in their annual reports, disclosing their ESG initiatives under SEBI Regulation 34(2)(f) and the BRSR Circular dated 10 May 2021. It showcases the global push to integrate ESG into corporate governance, making companies accountable for their sustainability and responsible capital practises.

As businesses and investors navigate this era of sustainability, it's clear that a profound shift in capital allocation and investment is underway. It emphasises integrating ESG factors and aligning investments with broader sustainability goals. This approach recognises that financial success and responsible practices are not mutually exclusive and can, in fact, be mutually reinforcing.

This article is authored by Rahul Gupta, founder and managing partner, ValuAble.