As we start with Samvat 2080 and winter is around the corner, the air quality is poor and is the focus of discussion everywhere. Therefore, one needs to be cognizant of the fact that ESG is very important in today's context.
ESG is an acronym for Environmental, Social, and Governance (ESG) that socially conscious investors use to select investments. ESG norms provide a more focussed ideology and specific framework that ensures expected returns.
Environment:
What kind of impact does a company have on the environment? This could be the company’s carbon footprint, toxic chemicals involved in its manufacturing and other processes, and its pursuit of sustainability throughout its supply chain.
Social:
How does the company improve its social impact, both within the company and in the broader community? Social factors would include gender equality, racial diversity in both the executive suite and staff overall and inclusion programs and hiring practices.
Governance:
Governance includes everything from issues surrounding executive pay, diversity in leadership, and transparency with shareholders.
Therefore, ESG is a practical, real-world process for addressing how a company serves all its stakeholders: workers, communities, customers, shareholders, and the environment.
ESG research firms produce scores for a wide range of companies. Those scores provide a clear and handy metric for comparing different investments.
ESG is popular due to the following factors:
1. It reduces risk and creates value for investors and for companies.
2. It helps regulators to get information and process it as well.
3. Investors are increasingly choosing to invest in companies that align with their values and goals.
4. Companies that perform well on ESG are less risky, better positioned for the long term, and better prepared for uncertainty.
5. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.
6. Helping environmental and ecological causes.
7. Holding companies accountable for their actions
8. Rewarding ethical companies based on their principles
9. Obtaining inflation-beating returns while making a difference.
The ESG industry helps highlight companies that may be riskier than traditional investing guidelines alone might suggest. Using an ESG lens could help investors find better, more profitable opportunities.
Promoting strong corporate governance, protecting the environment and encouraging high social standards are on the minds of many investors throughout the world. But many are grappling with whether they should do anything about it within their portfolios.
It is believed that it is critically important for investors to carefully weigh the decision of whether and how to address ESG-related issues.
Many ESG investing approaches are available and deciding which tools to use depends on a variety of factors.
It is possible to create portfolios with superior ESG characteristics while achieving risk/return profiles that match those of traditional portfolios at the same time.
Reasons for sustainability of ESG
1. Investors are demanding ESG Investments:
The shift to sustainable investing is so powerful because it’s being driven by demand from investors. Investors – from individual savers to large institutions – are investing in sustainable strategies as they look to use their capital to help create a more sustainable world.
2. Technology is providing transparency and good governance:
The internet transformed the way information is captured, documented, and disseminated, providing investors with access to more data than ever before. This has caused data democratisation. The result has been a dramatic improvement in corporate transparency, as new data sources provide better insights into how companies are being run from an ESG perspective.
3. Corporates are encouraged to take action:
The good news is that many companies around the world already understand the need to take action on ESG issues— because they recognise that they can only deliver sustainable long-term growth if they manage the Earth’s resources prudently, treat their workers with respect and look after the natural environment in which they operate.
4. Investment research is focussed on sustainability:
The Fund Managers are looking at ESG aspects before investing. New ESG frameworks are being developed to support sustainable investment management.
Increasing investor interest, a sharper corporate focus and a significant improvement in data availability are all set to further support the growth in sustainable investing.
Some obstacles need to be overcome—in terms of investor acceptance and also corporate adoption. New ways to capture sustainable returns are being developed, and with many more companies committing themselves to sustainable business goals, it has become easier for investors to mitigate ESG risks in their portfolios while contributing to positive change.
(The author is Chief Investment Officer at IndiaFirst Life)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
