Environment, Society and Governance are the 3 defining factors that revolve around the strategy of ESG investing. Companies that are aligned with ESG norms and score high on these 3 non-financial parameters are considered as sustainable businesses in the long-run.
Environmental – An organization is scored on basis of their friendliness to the environmental. Carbon footprint, efficient energy, dependability on natural resources, renewable energy, toxic emission, waste produce and more are criteria that fall under this section.
Social – Data security, human capital management, health, insurance, supply chain management, CSR projects and more are segments that add to the social quotient of the organization.
Governance – Financial stability, anti-corruption practices, transparency and disclosures, business ethics, frauds and malpractices are pointers that define the quality of governance of the organization.
Such organizations are less likely to get entangled in the web of malpractices or environmental compliance issues and usually score well in terms of good governance and regulatory compliance. These firms are considered as highly resilient organizations that can sail through the highs and lows of economic cycles, climatic shifts and change in societal preferences or governance issues.
Around the world
ESG-driven assets have now reached $40 trillion globally, with an approximate global inflow of $19 billion from year to date. In the US alone, we witnessed an inflow of $250 billion by the end of the second quarter in 2020. There is no doubt that ESG funds are catching on across the globe. Much of this acceleration has been attributed to the pandemic with investors understanding the vital role and requirement of long-term sustainable businesses in the current economic environment. Owing to the sustainability criteria, in these volatile markets ESG funds have outperformed S&P 500 by 200 basis points.
The India Story
ESG investing deals with a thematic style of investing where the underlying stocks in these funds are invested in organizations that are highly rated in terms of environmental empathy, social responsibility and corporate governance. In India, the parameters to assess an organization based on ESG norms are as nascent as the funds themselves. No standard norms currently exist hence each fund house follows varied parameters to rate an organization on its ESG score. This hurdle could be attributed to the lack of data and transparency by organizations to share such vital information. In India, merely 100-150 organizations, most of which rank highest in terms of market capitalization have disclosed information on ESG related parameters. Fortunately, SEBIs recent 2020 mandate requires the top 1,000 listed companies to maintain and share a Business Responsibility Report (BRR) which will highlight the organization’s adoption and accountability towards ethical business practices. BRR could be a stepping stone towards easier segregation and stock selection for ESG investing.
A combination of sound financial factors alongside structured ESG principles can assist organizations to build strategies for the future. A typical ESG scheme would filter firms based on ethical practices or products, take for instance manufacturers of tobacco or alcohol being excluded based on Shariah principle or a manufacturing organization excluded for its poor waste management practices. Alternatively, firms that contribute to social causes will receive a higher ESG score, one such example would be healthcare and pharma companies working towards the COVID19 vaccine.
The ESG strategy helps filter the unethical and unreliable businesses from the universe of stocks, thus naturally investing in high-quality stocks backed by sustainable business models. Such combinations of underlying investments are bound to outperform markets in the long-run. India currently is at a nascent stage with 4 such funds floating in the market and several in the pipeline.
For more on ESG investing come talk to our experts in our next webinar session where we cover the India perspective on ESG investing and its future possibilities.
Topic: ESG Investing
Date: 30th October 2020
Time: 5:00 PM (IST)
Link to register: https://bit.ly/36pseOF