Are you investing in ESG responsible businesses?
Have you ever wondered about some qualitative aspects like Environment, Social and Governance prior to investing? Let us deep dive into this!
What Is ESG Investing?
ESG investing also known as “socially responsible investing” is an investment strategy in companies that takes companies environmental, social and governance factors into consideration and thereby creating a positive impact on the environment and the society. Generally, the senior management team drives the companies to achieve these goals by maintaining good corporate governance practice. ESG stands for Environmental, Social and Governance which together are the key to this form of investing style.
One of the key assumptions of ESG investing is that the financial performance of companies is affected by environmental and social factors. ESG style of investing has been present in some form or the other. For example: Muslims invest in companies which comply with Sharia Law. Many Jains do not invest in companies which manufacture tobacco or liquor companies.
There are a few questions which ESG investors seek an answer from the Company as well as from independent research houses prior to investing and while evaluating the company from an investment point of view. Based on these answers, an ESG score is arrived at and ESG investors use these scores to invest in the qualified companies.
Environment:
Does the Company have waste and pollution management strategy?
Does the Company utilize any renewable energy sources?
Are any steps taken to reduce carbon emissions?
Is the Company helping in curbing deforestation?
Is the company contributing towards biodiversity?
Social:
How does the company improve its social impact?
Does the Company provide good working conditions?
Does the Company provide equal opportunities to males and females?
Does it provide fair compensation to all employees?
What are the health and safety measures taken by the Company for its employees?
Is the hiring policy fair for everyone?
Does the Company engage in philanthropy activities?
Governance:
Does the Company have anti-bribery policy?
Is the Company involved in political lobbying or donations?
Is the Company tax compliant?
Is the business run ethically by the Promoters and Senior Management of the Company?
Does the board of directors address the concerns of the employees, shareholders, and customers?
Is executive compensation balanced compared to pay for other employees?
ESG investing is akin to “sustainable” investing. In traditional investments, value is derived by taking risks commensurate to the expected returns. In ESG investing, apart from the traditional investment style, even environment, social and governance related aspects are taken into consideration. ESG does not mean that the fundamental analysis is not done or financial ratios are not looked into. It provides additional insights into how value can be created by using ESG framework. The ultimate goal is to invest in companies that meet these ESG standards and avoid those which do not adhere. ESG investing is very popular in the West and is now gaining traction in India as well.
FinFact:
India has 10 ESG focussed funds and together they manage ~ INR 10,000 crores. SBI Magnum Equity is the oldest fund house managing ~ INR 4,000 crores
As per Global Sustainable Investment Review 2020, the global sustainable investments at the start of 2020 reached USD 35.3 trillion. This is about 35.9% of the total global assets under management.
As per Bloomberg article, Global ESG assets are expected to hit USD 53 trillion by 2025
Performance as on 30 July 2021 of few ESG Funds in India:
Generally, ESG score is higher for IT companies as they do not use very high natural resources which results in less wastage and environmental hazards. Whereas, Oil and Gas, Mining, Chemicals and Cement companies might have lower ESG scores as they use high natural resources and create a potential hazard to the environment.
CSR (Corporate Social Responsibility) v/s ESG:
CSR evolved prior to ESG and it is one of the key aspects without which ESG investments would not have evolved.
CSR makes the company accountable whereas ESG makes the companies measurable
While CSR is generally philanthropy, ESG is more encompassing and takes into consideration and makes the company accountable for environmental, social and governance standards
In a nutshell, ESG investing is evolving in India and it has its own challenges in terms of lack of quality data to understand the good sustainability practices. However, this is improving now and ESG will become an investment standard in days to come. ESG will help in understanding how companies make money instead of how much money the company makes.
Hit the button below and share the article with your friends and family!
Please do drop in your comments on the article in the link below:
And lastly, do subscribe to FinFacts to receive the newsletter directly in your inbox! :-)