The new buzzword in stock markets around the world is ESG investing The ESG theme, which represents companies that care about the environment, social and governance, has generated interest significant in developed markets such as the United States and Europe Although it is still in its infancy in India with only a handful of ESG mutual fund schemes, many asset management companies are lining up to launch them in the short term.
ESG programs seek to invest in companies that meet high environmental, social and governance standards Even in their day-to-day business operations, these companies show a relatively high degree of accountability to all stakeholders – employees, suppliers, dealers or anyone related to the company’s activities The management of these companies are empathetic to the environment and concerned with ethical business practices Typically, these companies transcend boundaries from simple robust profit growth to achieve self-imposed ethical standards in business operations.
The concept evolved over time but is mentioned at the end of the 20th century To give a few examples, investors excluded companies that made tobacco from their portfolios In the 1990s, John Elkington, co-founder of the business consultancy firm SustainAbility spoke about ESC (environment, social and corporate governance) He indicated that one should look at the “triple bottom line”, which refers to reporting results in three areas: profit, people and the planet
Market veterans believe that ESG companies demonstrate tremendous resilience in the face of ups and downs in business cycles, leading to sustainable growth They exhibit relatively low volatility in business due to lower incidence of incidents and accidents, controversies and enjoy greater loyalty from customers, employees and may be aware of the need to conserve capital This could prove beneficial for long-term equity investors
ESG investing is based on the assumption that as large retail investors invest in such companies, it would support stock valuation Indirectly, this would encourage the corporate world to act responsibly from a social, environmental and governance point of view
Factors such as climate change, changing societal preferences and governance issues pose risks to company earnings and therefore to investors in the stock markets Companies aligned with ESG standards usually have a risk lower losses due to these factors Thus, investing in companies with a high ESG score could translate into increased value for long-term investors
Media reports suggest there has been an increase in sustainable investment in the United States and Europe since the outbreak of the coronavirus pandemic At the end of the second quarter of 2020, investors have paid out nearly $ 250 billion of dollars in the United States, which represents 20% of the total market In Europe, the size of assets in these sustainable investment systems is three times that of the United States According to Morningstar Direct, the number of ESG schemes has increased from 1168 in 2009 to 3054 in 2019
The trend is also gaining momentum in India The Bombay Stock Exchange and the National Stock Exchange both have ESG index funds which, after due diligence, classified companies under this theme These indices would help compare mutual funds and structured products
Of course, investors should note that companies in this category mostly fall into the large cap category with strong business practices and environmental compliance.For example, ESG programs would omit major tobacco companies such as ITC Ltd, but would include a multitude of frontline pharmaceutical and banking companies Dr Reddy’s Ltd, Housing Development Company Ltd, Larsen and Toubro Ltd, Infosys Ltd and Axis Bank among others Note that these companies have indeed contributed to the national and social cause during the pandemic either by allocating financial resources, manufacturing health care products or offering Covid-19 care facilities
Indeed, the ESG philosophy is gaining popularity with young investors aware of the need to preserve the environment and adopt transparency in business practices Even the number of ESG-conscious companies is increasing as investors, regulators and stakeholders demand accountability not only on profits, but also on governance and social compliance
Mutual fund ESG programs allocate resources to companies that have adopted this philosophy consistently for several years They generally follow the benchmark line with sometimes marginal outperformance What is important is that they are resilient in times of crisis and generally tend to rebound quickly
In addition, ESG investment analysts eliminate the risk of return on investment associated with bad practices such as audit requests or lack of environmental compliance in the event of new plant start-ups or pure modification of practices. manufacturing to circumvent trade rules Because of these filtration practices, the benefits tend to be sustainable over long periods of time
For a layman it is very difficult to keep track of these factors of all listed companies in India One can overcome these limitations by investing in an ESG fund offered by mutual fund companies There are currently three programs in this space – Quantum India ESG Equity Fund, SBI Magnum Equity ESG Fund, Axis ESG Equity Fund and very soon ICICI Prudential is also launching an ESG fund The new funds offer period for this offer is from September 21, 2020 to October 5, 2020
Environmental, social and corporate governance, investment funds, socially responsible investment, mutual funds
World news – United States – The allure of mutual funds ESG investing around the world By R Venkatesh, founder of GuruRam Financial Consultants
