Ethical investment is a buzzword in the industry, but what is it, how does it work, which assets are ethical, and how do you decide which cause is worth your money? Let’s explore in this blog.
Dharma, the idea that moral duty, righteous action, and material success can coexist, has shaped India’s cultural DNA for millennia. And today, in business, dharma extends to how we treat workers, communities, and the natural world on which our livelihoods depend.
Yet, somewhere between ancient wisdom and modern markets, we forgot this principle or sidelined it. Profit got separated from responsibility. “How much?” overshadowed “how?” and “who bears the actual cost?” Success collapsed into a single metric: returns. Pollution, exploitation, and corruption were all dismissed as someone else’s problems or issues to be dealt with later. For years, investors were told it was smart to maximize shareholder value and leave morality outside the stock exchange.
But eventually, companies that pollute face fines, shutdowns, and cleanup bills. Poor labor practices trigger strikes, talent loss, and reputational damage. Weak governance invites fraud that can erase value overnight. These are documented losses that hit businesses’ balance sheets and the investors’ hard-earned money directly.
A new generation of Indian investors, from first-time earners to family offices, is demanding investments that change this practice. And that’s why they’re choosing ethical investing. But what is it, and how does it work, and how does one decide whether or not to practice it? This guide will explore it all.
Understanding Ethical Investing
At its core, ethical investing is an investment strategy where social, environmental, and moral criteria are factored into decision-making alongside traditional financial analysis.
While often used interchangeably with Socially Responsible Investing (SRI), it is best captured by ESG—Environmental, Social, and Governance factors. Let’s understand these in detail.
The three pillars of ESG
| Pillar | Focus Area (What does the company do?) | Indian Examples |
| E: Environmental | Climate change, carbon emissions, pollution, energy efficiency, waste management, and renewable resource use | Investing in solar/wind energy providers like Adani Green, avoiding coal-fired power plants |
| S: Social | Labour practices, employee health and safety, diversity, community engagement, human rights, and consumer protection | Supporting companies with excellent worker safety records and active CSR programs (e.g., ITC’s e-Choupal) |
| G: Governance | Corporate integrity, board diversity, executive compensation, anti-corruption policies, and shareholder rights | Choosing firms with independent boards and transparent financial reporting, essential for curbing cronyism |
How Ethical Investing Works
The transition from traditional to ethical investing follows a systematic process. Fund managers and investors use various screening methods to filter the universe of investable companies.
Negative/Exclusionary Screening
This is the most straightforward screening method. In this, investors exclude sectors or companies that conflict with defined ethical values.
- Examples of exclusions: Tobacco, alcohol, gambling, weapons manufacturing, and fossil fuel extraction
- Practical application: Many faith-based funds in India, such as Shariah-compliant funds, use exclusionary screening to avoid companies involved in interest-based lending (riba)
Positive Screening (Best-in-Class)
Rather than simply avoiding “bad” companies, this approach actively seeks out the leaders in each sector. It recognizes that a chemical company inherently faces environmental risks, but it invests in the one that manages those risks best.
- Mechanism: Companies are scored (often by third-party ESG rating agencies like MSCI or Sustainalytics) on their ESG performance relative to their industry peers
- Result: A portfolio of companies that are ESG champions, fostering competition for better corporate behavior
Norms-based Screening
This involves screening companies against international standards and conventions, such as the UN Global Compact principles on human rights, labor, environment, and anti-corruption. Any company in repeated violation is flagged for potential exclusion.
ESG Integration (The Modern Approach)
This method goes beyond simple screening. Fund managers actively incorporate material ESG data into their full financial models. They believe a company’s ESG score is an indicator of its future financial performance, risk, and management quality. This is the dominant and most sophisticated form of ethical investing today.
Popular Ethical Investment Options Available in India
The Indian market, backed by strong regulatory action from SEBI, has matured significantly in the ESG space. Retail investors now have several accessible and regulated options to build ethical portfolios.
Real-world Examples of Ethical Investment
Real-world examples in the Indian market illustrate how companies can be both financially successful and ethically sound:
- E (Environmental)
Infosys has achieved carbon neutrality years ahead of schedule and invests heavily in renewable energy, making it a clear leader in the IT space. Investing here supports a low-carbon business model.
- S (Social)
ITC Limited has been water-positive and carbon-positive for many years, actively engaging in massive afforestation and rural development programs (like the e-Choupal initiative), which directly benefit Indian farmers and rural communities.
- G (Governance)
Companies within the Tata Group are often cited for their strong corporate governance structures, which focus on long-term stakeholder value over short-term profit, setting a high standard for the Indian industry.
Choosing these companies means your capital is actively endorsing a model of business that prioritizes resilience, community upliftment, and sustainable growth.
Benefits and Challenges of Ethical Investing
As with any investment strategy, ethical investing presents both a compelling upside and certain structural hurdles, particularly in a developing market like India.
These are the benefits of ethical investing:
| Financial Benefit | Ethical/Societal Benefit |
| Risk Mitigation: Strong ESG practices reduce exposure to regulatory fines (E), labour disputes (S), and management fraud (G), leading to lower financial volatility. | Values Alignment: Allows investors to create a positive impact that aligns their portfolio with their moral and social beliefs. |
| Long-Term Performance: ESG-focused companies are often better managed, innovative, and positioned for a future economy, potentially leading to superior returns over a 5-10 year horizon. | Drives Corporate Change: The shift of capital into ESG funds creates a strong market signal, compelling more Indian companies to adopt sustainable practices to attract investment. |
| Regulatory Preparedness: Companies compliant with SEBI’s BRSR and environmental norms are less likely to face regulatory headwinds. | Attracts Talent & Customers: Ethical businesses often have higher employee morale and are preferred by conscious Indian consumers. |
But, there are a few challenges as well:
| Challenge | Explanation (in the Indian Context) |
| Greenwashing | Companies exaggerate their sustainability efforts (e.g., a power producer launching a small solar project while vastly expanding coal operations). SEBI’s stricter disclosures are actively fighting this. |
| Data and Disclosure | While SEBI mandates BRSR for top firms, data quality and standardization across all listed companies can be inconsistent, making comparisons difficult. |
| Subjectivity of Ethics | One investor might find an ethical issue with a large bank’s carbon footprint, while another praises its financial inclusion efforts. What is ‘ethical’ remains a personal definition. |
| Portfolio Concentration | Exclusionary screens can limit the universe of stocks, potentially leading to lower diversification or forcing funds to concentrate heavily in sectors like IT. |
So, Should You Choose Ethical Investing?
Ethical investing is a pragmatic strategy. The global push towards net-zero carbon, coupled with India’s stringent new corporate governance and sustainability reporting standards, makes ESG factors fundamentally material to a company’s financial future. The risks associated with ignoring these factors, from pollution liabilities to regulatory fines, are growing larger by the year.
Suppose you are a long-term investor who believes that responsible companies are better companies and that the financial system should be leveraged to address real-world problems like climate change and social inequality in India. In that case, integrating ESG into your portfolio is not just an option, but the next logical step in sophisticated investing. You can start by defining your own personal “Red Lines” and “Green Lights” and seek out the funds that share your mission.
