What is ESG Investing?
Basic Concept & Definition
ESG refers to Environmental, Social, and Governance Investing. ESG Investing gives the investors an overview of parameters other than financial indicators. It enables them to measure a company’s performance with the help of non-financial indicators with the help of different ESG criteria such as Carbon Footprint, Gender Inequality, Difference in the average pay of Top and bottom-most level of employee, Transparency by board members, ethics, etc. These factors are not disclosed in the financial reports, but you can get to know more about it through Corporate Social Responsibility (CSR) Report.
Explaining ESG Factors:
Environmental criteria signify the organization’s response toward environmental factors such as-
· Disposal of Hazardous Waste
· Carbon Emissions
· Climate Changes
Social criteria signify a firm’s attitude towards the society, people, and its relationships such as-
· Average Pay Ratio b/w Top and bottom-most level of employee
· Child Labour
· Human Rights
· Gender Diversification
· Employee Turnover Ratio
Governance criteria include the running of a company by its officials and focuses on –
· Transparent Practices
· Staying away from Political Practices
· Corruption & Bribery
· Shareholder’s rights
· Avoiding conflict between the Board Members
Rise of ESG Investing
There has been a significant rise in ESG Investing among millennials and people are getting more aware of it. People are now more conscious and concerned about which companies they are putting their money, and finding more data points for responsible companies to invest in. With several surveys taking place, it is found that people are diversifying their portfolios and taking environmental and socially conscious companies with corporate longevity going forward.
As people are increasing their presence on social media and on all the digital platforms, people are getting more aware. And, with the data revolving around with just one click, people are socially informed and any news strongly affects the stock price of a company.
The other side of ESG Investing
Though the idea of ESG Investing is gaining traction and becoming popular among the masses, the idea of ESG can differ from person to person. A mutual fund manager handling your portfolio might have different views regarding a company, and you as an individual might have different ethics which results in differentiated opinions.
While there is a difference in ethics & opinions, it is very difficult for a company to fulfill all the three criteria of ESG. For instance say, there might be a company XYZ who is producing a lot of chemical waste and dumping it into the river, and XYZ company is also promoting girl’s education and contributing to the welfare of girl’s education. In this scenario, it becomes difficult for an individual to make decisions, and thus, it strongly depends upon your personal ethics in which company you want to invest.
ESG Investing in India
With the awareness increasing day by day, we have ESG based funds established in India. Quantum India ESG Fund, SBI Magnum Equity ESG Fund, ICICI Prudential India Opportunities Fund, Axis ESG Equity Fund are some of the India – based funds. Now, if we compare the performance of NIFTY ESG and compare it to NIFTY, NIFTY ESG has outperformed the NIFTY with the higher returns in 4 out of 6 calendar years since 2011. Thus, with the long-term horizon, NIFTY ESG has outperformed NIFTY 100.
SOURCE: NSE WEBSITE
Companies failing to pertain to ESG Criteria
We have real-time examples in the Indian Context itself, to have a look at companies who have been completely shut down or suffering from abrupt losses or bankruptcy. One of them being Kingfisher, the failed governance of board members and not being transparent enough in their activities have resulted in the firm facing losses. Another recent example is the fall of Yes Bank which is strongly reflected in its share price.
Thus, one needs to be more aware and choose the companies which match with their set of ethics. People tend to remain invested for the long term in the companies which coincides with their set of values and thus generate higher returns.