Investing can be hard even in a boom economy by retail investors given the opacity of information vis-à-vis institutional investors in the market. ESG investing has been the holy grail in recent times, by many socially conscious investors seeking to make a difference.
What is ESG investing?
ESG (Environmental, social & Governance) investing follows a set of criteria or investing patterns based on how an organization considers the impact of its activities on the environment, manages its relationships not just with its investors but also with its customers, suppliers & the broader community it operates in and finally, its transparency and its leadership practices, audits, internal controls and shareholder rights.
What’s in it for the investors with ESG investing?
Viewed with a critical eye, ESG investing sounds like an oxymoron. Investment, after all, is made with the chief aim of maximizing personal wealth. Why shackle your investing strategies to a sub set of the available investment horizon when more profitable opportunities are abound?
Shareholder activism for instance (the “G” in ESG) has been known to drive company agendas as well as increasing the yield on investments by forcing such organizations to reshape, refocus and play to their strengths. Think of Carl Icahn and how Paypal was spun off from eBay as a result of his activism and the resultant gains as an example.
Green or carbon neutral companies such as Tesla which were once viewed as unicorns are now market darlings. ReNew Power in India for instance, has had considerable success in raising funds given its renewable energy focus in recent times due to the changed energy policy and energy mix of the government of India.
As an investor, whether institutional or retail, ESG investing is the new wild west in terms of making gainful investments over the medium and longer term. MSCI India ESG Leaders Index fund and Nifty 100 ESG Index are two of the top ESG Indices that have caught the fancy of many retail investors. However, it must be noted that a stock that figures in any of the ESG indices need not necessarily score high on all aspects of the criteria. For instance, a company might have a stellar environmental record but poor governance structure and vice versa.
ESG investing in India is still a somewhat growing and ambiguous phenomenon but a step in the right direction. Combining ESG investing with traditional stock investing steps may lead to more gainful investments at present.
What’s in it for the corporations that follow ESG criteria?
The answer lies in the changed perception of the investors as well as the general populace. For instance, a company that follows a robust governance criteria (the “G” in ESG) would be rewarded in the medium and longer term by the market for the transparency it offers around its operations and the professional expertise in navigating the vagaries of economic cycles. Infosys and Tata Sons are great trend setters in the Indian scenario in this regard.
Similarly, an organization that sets a healthy social criteria (the “S” in the ESG) as a part of its operations is rewarded in the longer term via excellent stakeholder relationships with its suppliers, customers and a loyal employee base as they stay invested in the success of the organization. The social criteria makes the most sense in this regard as it has a direct effect on the bottom line financial results of the organization. The community engagements are a growing pillar in this regard which definitely has a bearing on the goodwill and corporate image of the organization. Think of P&G’s earmarking of a part of sale proceeds from their products for furthering educational opportunities for underprivileged children in this regard.
With climate change and numerous environmental challenges in the forefront, the “E” in ESG is all the more important from a regulatory and societal standpoint. Aggressive environmental monitoring is the order of the day and companies that do not invest in an environmental agenda can be penalized in terms of fines, suspension, loss of public trust and sometimes, even be suspended from business activities altogether.