In India, the evolution of ESG began in 1988 where companies were required to disclose on energy conservation measures.
Businesses today are implementing best practices for environmental preservation which can indirectly impact profitability over the long term. Hence, this is also a time for investors to start exploring opportunities to invest in such companies which in turn has material impact on their investments.
When you think of long term inflation beating investment avenues to achieve your envisioned financial goals, one can consider equity investments. It comes with a risk-reward payoff in the long run. However, the search should not be limited to investment opportunities with greater bottom lines.
In the journey of wealth creation, investors also need to be responsible to Environment, Social, and Governance (ESG) issues.
ESG Investing – Better Planet, People and Profits
ESG investing considers environmental, social and corporate governance criteria to generate risk adjusted long-term returns and positive societal impact.
From investors perspective, by choosing and demanding investments that are environmentally friendly and ethical, and avoiding those which are not, one can put pressure on businesses to do the right thing for the planet and the society.
ESG aims to achieve the triple bottom line that is good for people, planet and profits.
Invest Responsibly. Move towards Better Planet, People and Profits
As responsible citizens, investors realize that their target investments should not only be on the basis of financial parameters but also on certain values or ethics that they identify with. This might include how corporations respond to climate change, water management, health and safety policies, management of supply chains, treatment of minority workers and whether they have a corporate culture that builds trust and fosters innovation.
A business which has good ESG practices has potential to deliver good risk adjusted returns in line with lower cost of capital and improved operational performance.
How did ESG investing evolve in India?
In India, the evolution of ESG began in 1988 where companies were required to disclose on energy conservation measures. After two decades in 2010, mandatory guidelines were established for sustainable development and corporate governance for Central Public Sector Enterprises (CPSEs)
The emergence of sustainability-oriented indices also impacted the growth of ESG investments in India:
- Crisil launched an ESG index in 2008 to track stocks of 50 Indian companies
- S&P BSE Greenex- Tracks the top 25 companies as regards greenhouse emission, Market Capitalization, and liquidity, launched in Feb 12, 2012
- S&P BSE Carbonex- Tracks 100 companies based on commitments to fight climate changes. The S&P BSE Carbonex Index was launched on Nov 30, 2012
- S&P BSE 100 ESG Index – is designed to measure exposure to companies that meet sustainability investing criteria while maintaining a risk/reward profile similar to that of the S&P BSE 100
- NIFTY 100 ESG Index – Reflects the performance of companies in the NIFTY 100 Index based on ESG score launched in Mar 27, 2018
ESG investing looks beyond bottom-lines
ESG investing covers a structured approach of measuring the sustainability of companies. Companies are evaluated on non-financial criteria that may have material impact on the firm’s valuation. It helps in identifying potential opportunities and underlying risks in a company’s business activities which has financial relevance.
Covid-19 considered as a turning point for ESG investing
Covid-19 is considered as a turning point for investors to prioritize a more sustainable approach. ESG investing has showcased resilience during the pandemic. As historical trend shows, ESG index has not only outperformed the Equity index over the period, but it has also protected downside risks better as represented in the chart below:
Past performance may or may not be sustained in future
Data Source: MSCI Indexes supplied by MSCI Inc, and MSCI ESG Indexes supplied by MSCI ESG Research Inc, a subsidiary of MSCI Inc.
Investments are important – but investing in responsible businesses is the order of the day. ESG comes into picture to enable investors to support – planet preservation, social impact & corporate governance – and also possibly achieve risk adjusted returns in the long run
Know more about the future of ESG investing in India and the world.
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