Equity investing is all about maximising wealth. But Indian stock exchanges are testing a new hypothesis that some investors might want to prioritise ethics over profits. BSE’s bespoke Saatvik100 and NSE’s Nifty500 Ahimsa indices will use an entirely new set of ethical filters to exclude entities associated with alcohol, tobacco, gambling, weapons, animal cruelty and so on. It’s a novel way to imbibe age-old Indian principles of non-violence and purity into stock portfolios often determined down to the decimal by financial metrics. As against balance-sheet combing, the indices will now benchmark businesses based on their moral fabric. The indices are not directly investible at present and asset management companies have yet to launch products linked to them. But when they do, they too will be subject to conventional market realities. It means, even ethics-based value investing by itself will neither guarantee rapid riches nor prevent falls.
Values-based investing is globally quite popular. For instance, the environmental, social and governance indices are among the fastest-growing segments with an estimated $30 trillion in assets. This is despite concerns that companies with questionable practices manage to secure favourable ESG ratings. Then there are Shariah-compliant indices excluding businesses involved in alcohol, gambling and other prohibited activities, and Catholic investment funds applying their own religious parameters. But unlike ESG benchmarks that rely on methodologies developed by globally recognised agencies, the Indian indices’ classification of companies is based on proprietary processes, raising concerns over the screening.
The launch of two new indices at a time when the country is witnessing persistent foreign capital outflows signals a significant shift in the equity markets. Success, however, will depend on whether profitability can coexist with ethical values and if capital will chase firms with fantastic financial growth or go after those doing good socially, ethically and morally. If investors indeed turn to the latter, it would be a major turning point influencing corporate behaviour and integrating financial performance with long-term societal impact. The challenge, though, is in converting the stated philosophical principles into rules-based framework with investors favouring value creation over wealth. In theory, the idea is as appealing as a bumper sticker saying, ‘Happiness is a matter of clean conscience.’ But neither stock investing nor business operations aim for happiness. Investors would be better off dripping with informed scepticism.