By Prashant Joshi
The age of the passive, unconcerned investor, who would see nothing beyond profits and dividends, is now behind us. New-age investors are expecting answers from corporate houses where they’ve parked their money.
Their focus has changed from ‘profit alone matters’ to ‘what is the source of profit?’. They’re keen to know what’s the impact of businesses on society at large. Additionally, they’ve faith that organisations conscious of the triple bottom line — people, planet, and profits — will deliver high risk-adjusted returns over the medium to long-term.
Businesses, too, have become increasingly conscious of their roles within the communities in which they operate. They respect stakeholders’ growing demands for transparency. Corporates are also looking at sustainability as a dynamic marketing concept that offers long-term benefits like enhanced customer relationships and a strong reputation, all of which translate into growth.
In short, investors, businesses and even lenders have settled in the hallowed Environmental, Social, Governance (ESG) space.
For the uninitiated, the ‘E’ of ESG considers how a company delivers as a steward of the environment. Broadly, the ‘E’ encompasses an organisation’s carbon footprint policies, water consumption, waste recycling and energy-conversation practices.
The ‘S’, rising to the forefront of corporate agendas, covers issues impacting employees, customers, consumers, suppliers and the local community.
The pandemic has brought the G into sharp focus, with companies now under intense scrutiny for their corporate conduct. The governance component relates to the board, leadership effectiveness, audit practices and business ethics.
That ESG is the thread that connects all categories of investors — institutional to High Networth Investors (HNI) to retail — could be gauged by a Deloitte report. According to Deloitte Center for Financial Services, ESG-mandated assets could make up half of all managed assets in the United States by 2025. Bloomberg has forecast global ESG assets to hit $53 trillion by 2025.
There is growing research that ESG issues can pose serious risks to operations and profits, thereby negatively impacting a stock’s valuation. Companies actively addressing such risks should see fewer business disruptions and produce comparable or more reliable financial results over time. That means lower downside risk for shareholders.
The general perception is that we’re still in the nascent stage of the ESG evolution. India has limited options to invest as of today. However, a slew of ESG-focussed funds has been launched in India recently, with many more lined up.
Several mutual fund houses provide access to ESG themes. The traction is building in the Portfolio Management Service (PMS)/Alternative Investment Fund (AIF) category, with Avendus, Philip Capital and other prominent fund houses offering ESG themes.
In an emerging country like India, engaging in an ESG theme will allow more companies to be ESG-compliant, which will lead to sustainable growth for future generations and contribute to wealth creation for both companies and stakeholders. In fact, in India, the Nifty ESG 100 index has delivered equal or more returns than broader Nifty indices, just like its global peers on a point-to-point and rolling basis.
Investors who prefer lesser volatility and drawdown may consider ESG investing. It is important to note that during the downcycles since 2018 and the market turbulence related to the COVID-19 pandemic, the ESG index (featuring companies with strong ESG track records) witnessed a lesser drawdown, which is reflected in lower volatility.
The relatively lesser drawdown is more pronounced in the global markets and, of late, seen in India too. However, during upcycles, the domestic ESG theme has relatively done better.
The recent SEBI consultation paper for ESG fund regulates MFs to invest in only those companies covered under the mandatory Business Responsibility and Sustainability Reporting (BRSR).
The regulatory initiative is a welcome move as it aims to establish links between the financial results of a business with ESG performance. The framework proposed by SEBI is in line with international standards and will serve as a single resource for sustainability reporting by listed companies.
It applies to the top 1000 listed companies by market capitalisation for reporting voluntarily for FY2021–22 and mandatorily from FY2022–23. It only enhances disclosures on ESG standards by Indian companies which is so heartening to see.
(The author is co-founder and partner, Fintrust Advisors LLP. Views expressed are personal.)