ESG investing means pursuing an investing strategy considering the Environmental, Social, and Governance factors. This concept has evolved globally since the early 1970s and has picked up decent traction in India’s investment landscape. The sustainable investing methodology seeks to gain positive returns by investing in companies that meet specific criteria. Several fund houses have been recently launched the ESG mutual funds in India, indicating the importance of this concept. A few examples are:
- Axis ESG Equity Fund launched in Feb 2020
- ICICI Prudential ESG Fund launched in Oct 2020
- Mirae Asset ESG sector leader funds of fund launched in Nov 2020
- Aditya Birla Sun Life ESG Fund launched in Dec 2020
- Kotak ESG Opportunities Fund launched in Dec 2020
ESG is an additional toolkit to analyze the companies based on aspects which are often not explicitly reported in financial statements. It may not be easy to appraise an investment based on ESG parameters, and the assessment is often subjective. However, with the Sustainability Accounting Standards Board’s establishment by The Institute of Chartered Accountants of India, the ‘sustainability part’ disclosure requirements will improve and benefit the investors.
Decoding E, S and G of the ESG
The assessment of a company happens on its preparedness, disclosure and performance across the three factors. ‘E’ measures impact of company’s business activities on the environment. ‘S’ measures how the company incorporates social elements in its policies and ‘G’ measures the effectiveness of the company’s corporate governance policies. Let us understand what each of these letters means a bit more in detail.
How sustainable investing concept evolved globally
In 1971, two US Methodist ministers, Luther Tyson and Jack Corbett launched the first mutual fund. They wanted to align their investments to reflect their values best and avoid investing in companies contributing to the Vietnam War. Their urge to the companies was to adhere to environmental and social responsibility standards.
That set the ball rolling for sustainable investing. The next few years saw decent progress, like the journalist Milton Moskowitz constructed a socially responsible stock list. In 1977 Leon Sullivan developed a code of conduct for companies, etc.
The anti-apartheid movement advocated divestment from South African companies in the 1980s. After the Exxon Valdez oil spill, the activists founded a Coalition of Environmentally Responsible Economies (Ceres) in 1989 that brings together investors, business leaders and public interest groups to speed up adopting sustainable business practices resulting into a low-carbon economy.
Global warming awareness improved, leading to the Kyoto protocol’s signature in the 1990s wherein several countries agreed to reduce the carbon emissions. Socially responsible investing efforts continued to grow, and propelled by global organizations. The United Nations launched Global Compact in the 2000s to encourage integrating environmental, social and corporate governance factors into capital markets. This eventually led to the development of ESG concept.
Later, Sustainability Accounting Standards Board was formed in 2011 to establish industry-specific standards for reporting ESG issues and help companies report ESG metrics.
Efficient use of natural resources has eventually become more important than ever. As times progressed, ethical investing drifted from negative screening (what to exclude!) to selecting stocks where investors should put money based on ESG criteria.
Future of sustainable investing is optimistic
ESG based investment strategy is prevalent globally. The emphasis is to invest in companies with a sustainable and responsible business model. Selecting an investment assumes that the company doing well will continue to perform well on ESG criteria. There will be enough reasons for companies to continue to operate in an ESG friendly business model in the future.
Given the focus, NIFTY100 ESG Index got launched in March 2018. This index has performed at par, if not better, with the broader market index signaling investors’ preference towards environmentally-friendly, socially responsible companies that demonstrate robust corporate governance practices.
As at December 31, 2020, the index has 88 participants and below listed are its top ten companies constituting about 56% of value:
|Company Name||Weight (%)|
|Tata Consultancy Services||5.13|
|Larsen & Toubro||3.15|
|Kotak Mahindra Bank||2.58|
Given the backdrop of immense global focus, we expect the regulations will only get stricter in India. Adherence to ethical business practices will improve, and that will be positive for ESG investors. Further, regulators will be harsh on the companies that defy the rules and penalize them heavily to support healthy behaviour. Eventually, sustainable investing will be the ‘new normal’, and the concept is here to stay. ESG friendly companies will make our society more livable for the current and future generations, promote ethical business practices and reward shareholders/investors.
The author is a senior finance professional with over fifteen years of work experience in corporate finance and has an affinity for personal finance and investment management. Please leave your comment or share thoughts on this article via email at email@example.com. For more articles, please visit the website www.decodefinance.in.
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One Reply to “Future of sustainable investing in India”
Great research and analysis!!