With increased focus on the environmental challenges plaguing various countries and communities in the world, there has been a marked shift in the way people are viewing their responsibilities in making the world a better place to live in. From food habits to consumption patterns to social attitudes to questioning regressive traditions – there is growing cognizance of how small steps can go a long way in the betterment of the society.
The world of investments is also witnessing a new trend owing to the heightened awareness about how our activities impact our ecosystems and societies. A consequence of that is the rise of ESG investing. The gamut of ESG investments revolves around investing in companies that have sustainable and holistic approaches towards conducting businesses – the E stands for practices that align with the commitment to ensure the conservation of the natural world, the S indicates the value system that a company relies on when dealing with people and communities within and outside the company and the G stands for adherence to management and governance practices that are transparent and ethical.
While the bandwagon of socially responsible investing is fairly new in India, the global investor community has been dabbling in the arena of ESG investing for a while now. The coronavirus pandemic and the ensuing sufferings across the globe has also attracted more investors to the phenomenon of ESG investing - as per data published by EPFR, socially responsible investing (SRI) or ESG investments have seen record inflows of $168.74 billion in 2020 versus $63.34 billion in 2019.
Investors who have recently become privy to the arena of ESG investing and are considering adding ESG funds to their portfolios often come across fallacious claims that ESG investments may cause them to compromise on profits because the pool of companies eligible for investment can be limited. On the contrary ESG funds can provide opportunities to rep greater profits because ESG funds only seek quality companies that are capable of generating sustainable growth. Fund houses filter companies for the long term who are considerate of the impact of their operations on all stakeholders since these companies have a better shot at being able to sustain capital appreciation.
A study published in 2015 by the University of Oxford and Arabesque Arabesque Partners titled “From the Stockholder to the Stakeholder” summarized approximately 200 scientific sources on the economic effects of sustainability and found that good ESG performance is linked to better stock performance. In India, the NIFTY 100 ESG Index has outperformed NIFTY 50 by delivering superior 5-year returns in 2020.
Investing in ESG funds also carries lower risks. This is because in a world which is painfully waking up to the far-reaching consequences of climate change, where consideration of ESG aspects will become indispensable for the conduct of businesses. Since ESG funds invest in companies that utilizes resources sustainably, is sympathetic to the well-being of its employees, stakeholders and society and is committed to clean governance, the potential risks are reduced. Companies whose business models can face threats due to insidious environmental, social and governance factors are an absolute no-no in ESG investing.
Factoring in environmental, social, and governance criteria goes beyond concerns of companies being ethically aligned with that of investors. ESG considerations help investors avoid companies whose practices could be the precursor to major troubles and the ESG sieving can help investors sidestep companies with red flags that can seriously dilute their long term prospects.
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