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I entered the stock market as a retail investor in 2021 with a strong desire to focus on promoting sustainability and Environmental and Social Governance (ESG) with my money. I had read a lot about how investing sustainably can make a difference in moving towards green growth. I also wanted to create an additional source of income, of course.

What did sustainable investing mean? To me, it meant putting my money into businesses that were addressing environmental degradation, combating climate change and improving resource efficiency through circular economy principles.

The signs were encouraging. Several articles on the internet claimed how companies that performed well against ESG markers were weathering the COVID-19 storm better. They had generated greater returns over the last decade and were poised to give better overall returns over the medium-term. ESG-focuses funds — rather mature in the North American and European markets — were growing in India. Out of 10 ESG-focused mutual funds in India, 6 launched in 2021 (source).

I dove in, ready to learn, invest, grow, and contribute. I wanted to invest sustainably – this meant putting my money into businesses that were addressing environmental degradation, combating climate change and improving resource efficiency through circular economy principles. Four years on, I continue to consider my investments through a sustainability lens, but several considerations and factors have changed. Here are my top 5 lessons from this journey.

Lesson 1: Invest in sound businesses, sustainability is an add-on

This is my biggest lesson from my investment and professional journey, but one not learnt directly from the stock market. This learning came about after spending hours researching different companies and start-ups and learning how to evaluate businesses for investment.

A lot of companies that build sustainable products make “sustainability” the reason for customers to buy their products. However, customers buy what is useful for them and what is convenient for them (a point elegantly elaborated on by Raz Godelnik). Sustainability is an added benefit. Its great to have principles when you are investing your money but this is your hard-earned money; your first goal is to get returns. Otherwise, you are investing in a hobby.

Lesson 2: Thematic funds and basket-of-stocks are convenient investment products

I started my investing journey with mutual funds and smallcase (the concept of a basket of stocks purchased together). While I did invest in traditional mutual funds (like a blue-chip large cap fund) as well, I was also keen to look for thematic funds that focused on ESG or sustainability parameters. I found the “Electric Mobility” and “Green Energy” smallcases, which were baskets of stocks with companies that are part of the electric mobility and renewable energy ecosystems of the country. I chose these two sectors because they were fairly mature in the market with a strong policy push to scale.

Using baskets of stocks and mutual funds allowed me to invest without worrying too much about whether the underlying businesses were stable — that is the job of the fund manager. I did have to conduct some research on the track record of the fund managers, and I did read about the companies who’s stocks I was buying, but I did not have to conduct a detailed analysis into their annual reports and financial statements. I was able to invest with my principles with relatively little effort. I continue to stay invested through such products.

Lesson 3: Things can go wrong

As with any investment, but especially in a nascent movement like ESG investing, you are likely to make investments that don’t perform well. This happened to me with an international Fund of Funds (FoF) — a product that invested in global mutual funds that focused businesses combating climate change. I am sure headwinds like the fallout from the pandemic affected the returns; this was an investment spread across the world and different countries reacted differently to COVID recovery.

But I eventually realized that I was also investing in this fund purely based on its concept. I had limited information on the underlying businesses, their sectors, the countries they are functioning in, and therefore, their regulatory and sectoral environments. This did not sit well with me. Which leads me to my next lesson…

Lesson 4: Invest in sectors you understand. You can evaluate sectoral trends and businesses better

My decision to invest in companies in the electric mobility and green energy sectors was also because these were sectors that I understood. I could understand sector trends and how the ecosystem functioned. If required, I could dig into companies’ business models and financial statements.

This is where my preference for basket-of-stocks over mutual funds developed. Investing in basket-of-stocks like smallcases allowed me to see each company I was invested in and individually assess them. Then, I could choose to increase or decrease my shares of those stocks depending on my personal bets, as opposed to being completely reliant on the mutual fund manager.

Likewise, I explored the circular economy sector and keenly studied the developments in waste recycling, particularly related to plastic and metals. These were sectors that I had peers and colleagues working in, and I could always get my technical doubts answered to better understand how the sector is faring. I made standalone investments in this sector after much research, study and discussions — a thoroughly enjoyable experience!

Lesson 5: Give a chance to traditional companies that are altering their businesses

An early opinion I came across was that as a sustainable investor, one must not invest in companies functioning in the fossil fuel value chain and other polluting sectors. This dogmatic approach seemed logical at first glance, but I quickly changed my mind. A lot of these companies have the financial clout and a keen sense of the economic winds to pivot their business models if sustainability is the demand of the market and the governments. They also have the scale to conduct R&D and subsequently deploy their products quickly, as opposed to newer businesses that have come up on the back of the sustainability movement.

So, traditional auto manufacturers that were a no-go for many of my peers didn’t seem like bad choices for me if they presented a clear sustainability transition strategy with targets and timelines. Likewise, I was comfortable considering investments into oil & gas companies because, especially in India, they are the companies leading the transition into alternative energy models like green hydrogen.

Other takeaways…

Surprisingly, I have not read a single ESG report or company Sustainability Report. I relied on news reports and company announcements, and only dived into financial or annual reports when I was interested or needed more information. These long-format reports are probably more useful for institutional investors than retail investors.

I also realized that its important to understand other investment basics. How to read financial statements, how to assess stock indices and factors, and having a diversified portfolio are age-old skills and practices that hold true in sustainable investing as well. It is worthwhile to spend time working on these basics.

Have you tried sustainable investing? How has your experience been?

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