Even though the idea of investing on the ESG parameter is at a nascent stage in India, it is very likely to catch up soon due to increasing awareness about such important aspects.
ESG based indices beat the NIFTY50 benchmark consistently from 2012-2018, bringing to the forefront the idea that companies that effectively manage ESG challenges are generally more sustainable in the long-run, and can offer a better risk-adjusted performance.
As individuals, we all need to save and invest to meet our various financial needs. At such times it is desirable that as a responsible citizen we should evaluate our target investments not only on the basis of financial parameters but also on certain good non-financial parameters. A good starting point for non-financial parameters can be ESG (Environment Empathy, Social Responsibility and Corporate Governance).
Even though the idea of investing on the ESG parameter is at a nascent stage in India, it is very likely to catch up soon due to increasing awareness about such important aspects. Let us discuss all about ESG investing.
The tangible and visible signs (melting glaciers, rise in average temperature) of global warming can no longer be ignored. The spike in air, water pollution coupled with ever-reducing forests cover for the past few years all point to our neglect of the environment. This has led to erratic rainfall, droughts and floods at the same time in different parts of the country. However, all is not lost as yet. There are ways and means to address this problem effectively by way of use of renewable energy, promoting plantation, better waste management and pollution treatment.
Apart from individuals, corporates too have an important role to play as they draw resources, both natural and human, from the places they operate. So, corporates are expected to take up measures of social responsibility. The Companies Act, 2013 mandates corporates to spend 2% of net profits towards social responsibility causes. Some corporations are following this in word and spirit while others are trying just for the compliance sake.
A good corporate governance practice is the single most important aspect directly affecting investors’ wealth creation ability in the long run. SEBI has been actively attempting to enforce good corporate governance by listed companies. Here also there are some which are complying with it in letter and spirit whereas others are doing it in letter only.
In effect, ESG investing is about investing responsibly where the management is very proactive about all the three factors and thus enhance shareholders value in the long run.
Why ESG + financial criteria makes more sense than financials alone
Good deeds are rewarded sooner than later, a rule which is relevant to both business and investing. Investing in a company following all the three parameters of ESG is called ESG investing. If a company adheres to ESG requirements, it invariably results in higher profits as it helps a company in all aspects, including brand building and customer patronage. The initiative of providing some rooms in their Taj Hotel by Tata for medical staff working for treatment of patients as well as serving food to the medical staff at their workplace, has helped Tata build a huge reputation. I myself have vowed to give preference to Tata products over other products. Like me, there must be many more individuals who were influenced by their generosity. All of these will ultimately result in better profits over long term due to customer brand loyalty. Because of these parameters, investing in ESG is also called sustainable investing due to the inherent sustainability of companies following ESG.
How can we invest in ESG companies?
It is very difficult for an individual investor to identify and invest based on ESG criteria in the absence of any readily available data. So, the best approach would be to look for mutual fund schemes which follow ESG as a mandate. As of September 2020, there are three mutual fund schemes investing based on ESG parameters – Quantum India ESG Equity Fund, SBI Magnum Equity ESG Fund and Axis ESG Equity Fund. ICICI Prudential Mutual Fund too has joined the band wagon with its New Fund Offering which opened on September 21, 2020 and closed on October 5, 2020.
How can one identify ESG companies?
These fund houses draw their companies, generally, from the SEBI mandated list of top 1,000 listed companies, which are required to prepare a business responsibility report (BRR) every year. The BRR has extensive disclosures about the level of adoption of responsible business practices. The fund houses have their internal criteria and systems to assign weights to companies based on multiple criteria. The companies are then given an aggregate score and if it is above a certain threshold, then that company qualifies to be considered for investment.
However, there are certain companies whose businesses are perceived as harmful from a social perspective, such as tobacco, liquor and gambling, which get excluded. Likewise companies with higher carbon footprint, or which draw on water heavily (bottling plants) or which pollute the air or water are given negative weights and sometimes altogether excluded. Companies with dubious corporate governance records too are excluded from portfolio consideration.
To conclude, ESG investing is all about investing ethically for one’s own financial wellbeing in the long run.
(The writer is a tax and investments expert and is working as Chief Editor at ApnaPaisa. He can be reached at email@example.com)