Environment refers to the use of clean energy, waste management, and conservation of natural resources. It includes protection of animals. Companies that follow energy harvesting by natural means in development of its products, leads to safety and preservation of our natural resources. Social criteria refers to business relationships. It includes corporate social responsibility and what a company gives back to society from its earnings and profitability. It refers to protection of human capital, human resource rights and community standards and favourable labour policies by company management towards the workforce.
Governance refers to how ethical the management is in conduct of its activities? What are the accounting, taxation and management rules followed? Companies that score high on Corporate Governance are clean and transparent in their books of accounts.. Such companies maintain a good Debt to Equity ratio.
Some of the parameters considered in ESG Investing are resilience, resource utilisation, business ethics, human capital and occupational health and safety, land and biodiversity, product governance.
Globally about $2.96 trillion has been invested in funds that are managed with an ESG focus, according to Morningstar. In India though, the concept is yet nascent. According to a Morgan Stanley survey conducted in 2019, 85% of retail investors are interested in sustainable investing.
ESG in India
The Nifty 100 ESG Index, was designed to reflect the performance of companies within the Nifty 100 index based on the ESG score. It has been seen that the Nifty 100 ESG Index has outperformed its parent index Nifty 100 across various 1,3 and year timeframes. The Indian mutual fund industry, always quick to capitalise on such themes, has rolled out new funds for investors based on ESG investing too.
Currently, there are top three funds in ESG — SBI Magnum Equity ESG, Quantum India ESG Equity and Axis ESG — following the ESG investment strategy in India.
Below is a comparison of them based on risk return parameters.
Benefits of ESG Investing
Sustainable was once considered for a niche set of investors who wanted to align their investment goals to their personal values and beliefs. By following the ESG method of corporate functioning; companies are more inclined to shareholder interest. The positive impact on the environment and social benefits are manifold. It helps in Financial Advocacy.
According to a study, following ESG Practises in an organisation resulted In better operational performance in 88% of companies, and better stock performance in 80% of the companies. It lowered the cost of capital for 90% of companies. Companies with high suitability scores showed better operational performance, less investment risk and higher resilience.
The future is not only about profitability. Bottom line numbers are impasse.
Aspects of Knowledge Capital, Corporate Governance and being mindful of our resources is a growing interest to protect our beautiful planet earth from extinction.
There will be many long-term impacts of the deadly coronavirus. The physical and mental wellbeing of our most treasured species and its sustainability – needs attention. Let us be conscious of this.
(The author is the founder of Dlzer Consultants, a financial planning firm, based out of Bengaluru.)