The ESG way to build a solid portfolio & improve the world around you too

Call it the new currency of investment. Consciousness about Environment, Social and Governance (ESG) factors in running companies has been rising steadily. Growing inequalities, need for social justice, better disclosure requirements and extreme weather conditions playing out around us have all led to a call for action in more ways than one. It has also catalysed investments into companies that pay special attention to environmental, social and governance issues.

Simply put, analysts study a company’s ‘Environmental, Social and Governance’ framework and measure growth opportunities and risks faced by them, which are typically not part of regular financial reporting. More and more companies in India today are making ESG disclosures in their annual reports, and some are even developing standalone ESG or sustainability reports. These reports showcase the initiatives taken to reduce the carbon footprint, water and air pollution and include fair labour practices, human rights and ethical business practices.

ESG first came to the fore in the United Nations Global Compact report issued in 2005. The report established the need to integrate ESG factors into capital markets to profit both companies and investors. Since then, ESG is no longer regarded as a niche concept. As an investor, using the ESG criteria can help you determine the future financial performance of a business.


How can ESG become a game changer


The future of our environment has become a priority among communities, governments and economies. Issues such as climate change, carbon emissions and deforestation have detrimental implications. Hence, to tackle these issues, there is an urgent need to generate social change, political action and financial support. To drive the overall ESG agenda, regulators have been nudging companies towards better disclosures and reporting.

Typically, businesses profit from economic rise, higher consumption, and globalisation. These factors have always supported and reinforced the role of businesses as providers of products, services, careers, and infrastructure. But in recent times, a company’s contribution to critical sustainability concerns such as climate change, biodiversity, human rights and inclusion have also risen.

Synchronously, the rise of technology has enabled stakeholders and shareholders to question the manner in which businesses act. All these have brought about a greater need for transparent measurement and disclosure of sustainability performance. For instance, through corporate reporting, you can identify and measure the company’s performance in the same manner as it uses the ESG report to make the right decisions.


Why ESG investing


ESG strategies are sustainable and have proven they can offer good returns. According to the Morgan Stanley Institute for Sustainable Investing, February 2021 Sustainable Funds outperformed their traditional peers. The report also revealed how monies invested in sustainable businesses offer lower market risk.

As per Bloomberg data, the MSCI India ESG Index has consistently outperformed its benchmark i.e. MSCI India from May 2011 to March 2021. The Nifty 100 ESG Index too has outperformed the Nifty50 and Nifty100 across both one and five-year time frames.


Getting started on ESG investing


Retail investors always have the option to evaluate the ESG initiatives of companies and make direct investments. This could, however, be time consuming and tedious and, therefore, should be left to experienced fund managers. They have the necessary expertise and tools to analyse the financial performance and ESG initiatives together to make appropriate investment decisions.

Investing in an ESG fund offered by retail money managers or life insurance companies can give you the opportunity to seek good returns and make a positive environmental and social impact. Such funds use ESG principles and invest in companies that are making efforts to protect the environment, be equitable and have high standards of governance. Through rigorous research fund managers identify companies with the right ESG values and invest your money in these companies to generate returns.

Most money managers today have a clearly articulated ‘Responsible Investing Framework’. Such a framework specifies how they choose to invest in companies that have better ESG practices with a focus on governance, which is then monitored through their stewardship policies, exclusion principles and external ESG ratings along with internal evaluation.

With more asset managers offering ESG funds as an investment option to retail investors, companies are being directly impacted. Becoming ESG-compliant not only increases their relevance as an investment option but also enables them to make a positive impact for the betterment of society. With investors progressively gravitating towards investing in ESG-oriented funds, they are making a difference in the way corporations function.

In fact, international investors investing in India-listed entities very closely scrutinise their ESG initiatives and base their investment decisions accordingly. Globally, assets under management (AUM) by ESG funds exceed $35 trillion. While the concept of ESG Funds is relatively new in India, as of July 2021, the total AUM stood at approximately Rs 115 billion.


Millennials are changing the face of investing


A vast majority of millennials today are conscious of environmental concerns, ensuring social equity and proper governance, which is likely to drive their investment decisions. It is a win-win situation as not only does it provide them with returns but also serves as a route for them to positively contribute to the society.

Given the millennial activism and spurt in sustainable investing, it is time for every generation to consider the ESG investment option. As more and more companies regulate their strategies and establish good corporate social responsibility, ESG investing will pave the trail for a sustainable and profitable tomorrow.

If you’re an investor that values the principles of ESG, it’s time to embrace responsible investing. ESG investing can be an excellent way of complimenting your portfolio with funds that reflect your standards and ethics while providing good returns.


(Jitendra Arora is Executive Vice President for Investments at ICICI Prudential Life Insurance. Views are his own)

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