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© BCCL Earth Day: The impact of ESG investing on environment is not clear⁠— but its effect on money is real

  • Environmental, social, and governance (ESG) stocks are offering better long term returns than the large caps on the Nifty 50.
  • ESG compliance may just be the latest fad, but it’s forcing companies to take a serious look at their research and development, social policies, and what kind of impact they’re having on the environment.
  • The more ESG compliant a company is, the more investors will perceive it as being sustainable in the long run and more willing the investor will be to put in their money.

On Earth Day 2021, the theme selected by The Earth Day Network is restoring the planet in times of crisis. And this time, market forces are at play too.

Environmental, social, and governance (ESG) is relatively new but there is big money chasing it already. More than a $1 trillion have been invested in companies that are making efforts towards sustainable development, which includes workplace diversity and transparency, aside from tackling climate change.

And this investment in ESG-compliant companies seems to be giving more returns than other categories.

An increasing number of investors are starting to care. “Companies go by profit maximization. When they clearly see that they have every reason to comply and this compliance will ensure that they’re better off also in terms of the profit that they earn, that’s where they’ll start doing it on their own,” Nawneet Vibhaw, a partner at Shardul Amarchand Mangaldas & Co with a specialisation in environmental law, told Business Insider.

The more ESG compliant a company is, the more investors will perceive it as being sustainable in the long run.

ESG and its money pull

There are a total of 10 ESG funds available in India. This includes new entrants like Axis ESG Fund, Mirae Asset Mutual Fund’s ESG Exchange ETF, and the ICICI Prudential ESG Fund.

Some have been around for longer than others. And, they’re not all the same — varying by market cap and sector preferences — but the common denominator is that they all use ESG scoring to determine companies worth investing in.

Top five performing ESG mutual funds in India:

Fund Return percentage as on March 31, 2021:
Three months Six months One year
Axis ESG Equity -0.51% 23.53% 44.14%
SBI Magnum Equity ESG Fund -2.16% 21.56% 53.30%
Quantum India ESG Equity Fund Regular Growth 1.94% 25.86% 64.85%
ICICI Prudential ESG Fund Regular Growth (Launched October 2020) -1.78% 15.25%
Quant ESG Equity Fund Regular Growth (Launched October 2020) 10.35%
Kotak ESG Opportunities Fund Regular Growth (Launched December 2020) 1.23%

Source: MorningStar

The Securities and Exchange Board of India (SEBI) introduced ESG for the top 1,000 companies on the stock exchanges in September, last year. The process is voluntary for now, but will be made mandatory once the next financial year kicks in.

To be part of the ESG wave, companies have to share information with the regulator about redressal procedures for complaints, research and development for better social and environmental outcomes, and provisions for the differently abled.

When it comes to the environment, they’re required to disclose the amount of energy consumed, water usage, and how sustainable are the input materials being used.

Companies realise that if they don’t score very high on the ESG front, they may not find investors willing to shell out capital.

What is ESG?

ESG is basically a set of metrics that helps stakeholders determine if a business is sustainable. This includes things like workplace diversity, addressing climate change, and transparency.

And, when investors are looking for companies that will survive any economic upheavals — like a pandemic or natural calamities — they look at the companies’ ESG score. This means big wig companies are more likely to put their money in companies that ESG compliant than those which are not.

Why does the ESG score matter?

You can think of ESG like future proofing a company. Being ESG compliant means that a company is claiming to address issues like climate change and discrimination, that could create bigger hurdles in the future.

What is the problem with ESG?

The only criticism of ESG is that it’s more for the press and there is no one checking if net-zero promises and pollution control measures are actually being implemented on the ground. People who track the space say that the process of cross-checking isn’t in full force yet.

“ESG investing faces its own set of challenges, the primary one is a lack of quality data. In our experience the lack of data has been not because companies don’t have good sustainability practices, it’s just that the disclosures are lacking,” said Morning Star in its report.

Even so, the trend of investing in the right places, even if compliance checks come in later in a step in the right direction. “ESG is great for now, let’s see how it’s actually implemented, how companies actually comply with it over the course of the next four-five years. That’s sufficient time for actually making a lot of improvements,” said Vibhaw.

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