What is ESG investing?
ESG investing is a relatively new method of identifying companies to invest in, based on the three major factors. ESG stands for environmental, social, and governance. These are the three factors based on which the sustainability and societal impact of investment are gauged. It extrapolates these factors for each company, based on which the company is rated. These ratings determine the favorability of an investment in that company.
Now, each of these factors has multiple sub-factors within them which play a role in the final rating. For instance, factors such as air and water pollution, deforestation, waste management, and many more, are all calculated to finally contribute to the ‘environmental’ factor.
ESG investing aims to fulfil the Sustainable Development Goals laid down by the United Nations, which are a collection of 17 interlinked global goals designed to attain a better and more sustainable future for all.
How is it different from the traditional way of identifying an investment opportunity?
The traditional way of gauging a company is by looking at its financials and factors such as how profitable the company is, or how the sales were. If one delves a little further, one may study the management and get reviews about the functioning of the company. However, what ESG investing focuses on is sustainability. It takes into consideration much more than the factors considered by the traditional methods of investing.
What are some factors considered under ESG?
Environmental: Carbon change and carbon and emission, Air and water pollution, biodiversity, deforestation, energy efficiency, waste management, water scarcity, etc.
Social: Customer satisfaction, data protection and privacy, gender and diversity, employee engagement, community relations, human rights, labour standards, etc.
Governance: Board composition, Audit committee structure, bribery and corruption, executive compensation, lobbying, political contributions, whistleblower schemes, etc.
ESG Investing in India
ESG investing is in its nascent stage in India and is not as widely used. However, we are seeing signs of its rise as more companies are realising the importance of sustainability. “Practice of ESG helps reduce cost, gives new sources of revenue, access to new talent, and brings you, new consumers. It is another quiver for companies to become more resilient,” says Anirban Ghosh, Chief Sustainability Officer at M&M.
“In times of Covid-19 uncertainty, it was yet again proven that companies having better ESG strategy do well by protecting people, communities and economic performance,” says Mahendra Singhi, MD & CEO of Dalmia Cement. “Therefore, it is a natural inclination for investors to follow ESG and sustainability as alpha to beat the indices, and reduce overall volatility and known systematic market risks.” It is safe to assume that there is immense scope for ESG in India, however, will it be effective and profitable?
The events related to the pandemic and other natural disasters that have shaken the world in recent years have put ESG investments in the spotlight. Significant inroads are being made by major companies and Venture Capitalist funds that are looking to fund companies. One such example of an ESG fund in India is Avendus India ESG Fund. It is a Category III Alternative Investment Fund that focuses on investing in companies that have sound ESG adherent policies. A handful of Indian companies have also made it to the Dow Jones Sustainability Index, a combination of Indices that track the stock performance of the world’s leading companies in terms of economic, environmental and social criteria. In the year 2020, Hindalco Industries Limited, the metals flagship of the Aditya Birla Group was ranked as the Aluminum Industry Leader for its sustainability performance and practices this year. It was the only Indian company to be recognized as an Industry Leader by the rankings this year.
Tata Motors being recognized as an Industry Leader in the year 2018.
Future of ESG investing
Here’s what Forbes has to say about the future of ESG investing- “ESG investing is here to stay in one form or another. It’s already growing into a dominant force in Europe as Price Waterhouse Consulting claims that 60% of mutual fund assets there will be ESG related by 2025.” Larry Fink, BlackRock CEO is quoted as saying “Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and a higher cost of capital.” There’s a lot of conflicting opinions about ESG with some investors believing that it will reduce the return on investment, while some believe that the companies that fulfil the sustainability requirement are the ones that provide better returns. Either way, there’s a lot in favour of ESG as experts in top companies have vocalised their inclination towards ESG investing. Will ESG Investing truly be the new and profitable way of investing, or is it just another ephemeral fad that will die down in the time to come? Considering all the conflicting estimations and opinions, only time will tell.