ESG Investing

ESG investing is all about putting money into companies that care about good things like the environment, social issues, and how they're run.
ESG Investing
3 min
02-July-2024

Environmental, social, and governance (ESG) investing involves screening investments according to corporate policies aimed at promoting responsible behavior, and many brokerage firms provide investment products that adhere to ESG principles.

The investment landscape in India has evolved considerably over the past few years and is becoming more in line with global standards, with ESG investing being at the forefront of it all. ESG investing is an investment approach focusing on environment-friendly and socially responsible companies with strong corporate governance cultures.

In this article, we will look into what ESG investing is, how it works, why you should pursue this investment approach and its various challenges.

What is meaning of ESG investing?

The term ESG stands for Environment, Social and Governance. ESG investing is a unique investment approach where investors place increased emphasis on non-quantitative aspects of a company, more specifically, the environmental, social and corporate governance aspects. To put it in simple terms, ESG investing involves investing in companies that display strong environmental awareness, social responsibility and corporate governance practices.

By incorporating environmental, social and corporate governance factors into investment decisions, investors aim to encourage companies to act responsibly and sustainably.

Example of ESG investing

A common example of ESG investing is when an investor chooses to purchase the stocks of a company that prioritises environmental sustainability and social responsibility. For instance, the company may have implemented green initiatives to reduce its carbon footprint or it may have promoted fair labour practices. Due to these measures, the company may have a higher ESG score and appeal than other entities that are not as committed to sustainability and social responsibility. Similarly, companies with a strong corporate governance structure may also be preferred by investors looking for ESG-oriented stocks.

How ESG investing evolved globally?

ESG investing originally began as socially responsible investing in the early 1960s. During those years, socially conscious investors avoided investing in companies that contributed to social evils and unfair practices like manufacturing tobacco or racial discrimination.

Eventually, over the decades, socially responsible investing evolved into ESG investing as we know it today. Although it is still a relatively new concept in India, the financial markets in the country offer a plethora of ESG investment options for interested investors today.

Also read about: What Is SIP investment

How does ESG investing work?

Now that you are aware of the definition of ESG investing, let us look at how ESG investing works.

Investors who adopt ESG investment principles are socially conscious and screen their investments thoroughly based on three non-financial metrics - environment, social and governance. Here is a closer look at each of these metrics.

Environment

Investors thoroughly assess the impact that companies have on the environment. This includes examining the company’s policies and procedures on waste management, energy usage, pollution control, greenhouse emissions and compliance with the various environmental laws. Companies are rated based on environmental awareness and the various measures they take to reduce the negative impact on the environment.

Social

The social aspect of ESG investing deals with the company’s relationship with its various stakeholders. Investors thoroughly evaluate the various labour practices followed by companies. This includes assessing their treatment of employees, working conditions, employee benefits and diversity. Additionally, investors also investigate the company's stand on human rights and their relationship and engagement with the local community.

Governance

The governance aspect of ESG investing involves examining the corporate governance practices of companies. Investors explore the composition and independence of the board of directors and companies’ commitment to transparency, integrity, and ethical conduct. Furthermore, shareholders’ rights, compliance with laws and regulations and anti-corruption measures are a few other governance-related criteria investors also look into.

Companies that demonstrate strong performance across these three criteria are ranked higher and considered more sustainable and resilient in the long term.

Reasons why ESG investing matters

ESG investing matters because it aligns the financial goals of investors with their values. Simultaneously, it also ensures that companies prioritise goals like environmental sustainability, social responsibility and strong governance practices. This approach reduces risk, creates value and also promotes long-term success for the entities who adopt the best ESG practices.

Since investors begin to increasingly seek out companies that are committed to sustainability, fair labour practices and responsible governance, the overarching benefits for the economy and society also improve. Ultimately, ESG investing drives positive changes and sustainable growth for future generations.

Also read about: What is investment management

List of ESG funds in India

Some of the ESG mutual funds available in India include the following:

Is ESG investing suitable for you?

ESG investing may be suitable for you if:

  • You prioritise environmental sustainability and social responsibility in your investments
  • You want to reduce your exposure to companies with poor ESG practices
  • You seek sustainable long-term returns rather than short-term gains
  • You want to align your investments with your personal values

Why ESG investing can be beneficial for investors?

Investors are increasingly drawn towards ESG investing for a wide variety of reasons. Let us explore some of the most common ones.

Reduced risk

Investing in companies with ESG practices makes investors less susceptible to risks related to environmental regulations, controversies and corporate governance issues.

Higher long-term return potential

ESG investing could potentially create value over the long term by focusing on sustainability and responsible business practices.

Increasing awareness and demand

Investors are now increasingly aware of the impact of companies and their actions on the environment and society, leading them to be more conscious of the companies they support.

Alignment with personal values

ESG investing allows investors to focus on supporting causes they care about while simultaneously creating wealth over the long term.

Improved corporate behaviour

ESG investing, directly and indirectly, encourages companies to be better at corporate governance, more conscious of the environmental impact of their actions and more mindful of how they treat their stakeholders.

Who should choose ESG funds?

The following categories of investors may find ESG mutual funds suitable for their portfolios:

  1. Socially responsible investors: These are investors who prioritise environmental, social and governance aspects in their strategies.
  2. Long-term investors: These are investors with a long-term outlook focusing on earning long-term returns rather than short-term profits.
  3. Impact investors: Impact investors aim to create a positive environmental and social impact through their choice of investments.
  4. CSR advocates: These investors advocate for increased corporate social responsibility among the companies in India and aim to invest in companies that meet their CSR criteria.

Also read about: What is lumpsum investment in mutual funds

The rise of ESG investing in India

ESG investing in India has an interesting history. Let us trace the history and the growth of this sustainable investment practice in the country.

  • Developing a greener economy
    Encouraged by the Paris agreement in 2015, India made a commitment to reduce its GHG emissions and carbon footprint. Nationally Determined Contributions were also defined, with India aiming to reduce the emissions intensity of its GDP by 45%, achieve a 50% cumulative electric power installed capacity and create a carbon sink of 2.5 to 3 GtCO2e — all by 2023.
  • From national to global
    Next, India went about establishing and streamlining corporate governance requirements and ESG guidelines within the domestic market. Simultaneously, the domestic financial markets were also opened up to include ESG funds from international markets, so Indian investors could participate in the global sustainability movement.
  • Rising demand among domestic investors
    Domestic mutual fund houses then began to show rising interest in including ESG funds among their offerings. Indian investors too responded to this rising call for sustainable and socially conscious investing. Many institutional as well as retail investors started to prefer ESG funds over other types of mutual fund schemes.
  • Strategic ESG-oriented reforms
    Alongside these changes in the Indian financial markets, several ESG-oriented reforms were also introduced in India. Some of these include a conscious shift to promote renewable energy sources, the rising preference for electric vehicles (EVs) and various mandatory as well as voluntary guidelines to promote more responsible corporate behaviour.
  • The launch of sustainability indices
    Another recent reform that has furthered the reach of ESG investing in India is the introduction of sustainability indices. These indices, like the NIFTY 100 ESG Index, S&P BSE Greenex, NIFTY 100 Enhanced ESG Index, S&P BSE 100 ESG Index and S&P BSE Carbonex — offer readily available portfolios for ESG mutual funds to replicate or use as benchmarks.

Challenges with ESG investing in India

As a potential investor, you must understand the various challenges ESG investing faces in India. Here are some of the key issues with adopting this approach.

  • Lack of accurate data
    The unavailability of reliable data is another major reason why ESG investing has not become popular in India. Investors are finding it difficult to properly assess companies.
  • Lack of estimation standards
    The evaluation and comparison of companies is very challenging without proper standardisation of ESG metrics.
  • Preference for traditional investments
    Conservative investors continue to prefer traditional investments and established investment options. So, making the shift to ESG investing or even expanding their existing portfolios to include some sustainable investments can be challenging for such investors.
  • Limited track record of ESG funds
    ESG funds are mutual funds that are focused on ESG investing. These funds only invest in companies with strong environmental, social and governance practices. However, the relatively short track record of ESG funds in India makes it difficult for investors to gauge their performance and reliability.
  • Lack of awareness
    Although ESG investing has become quite popular in the country, a large number of investors are still unaware of the concept and its potential benefits. Such lack of awareness is hindering the widespread adoption of this investment approach.

Also read about: What is portfolio investment

Conclusion

ESG investing is transforming the way investments are made. The investment approach encourages investors to focus on qualitative aspects in addition to quantitative metrics, allowing them to achieve their financial goals while simultaneously contributing to a more sustainable world.

If you are looking for ESG funds to invest in, visit the Bajaj Finserv Mutual Fund Platform. You can find more than 1,000 mutual fund schemes, including those that are based on ESG investing principles. The platform also offers several tools and calculators, such as a SIP calculator and a lump sum calculator, to help you plan your investments.

Frequently asked questions

What does ESG stand for?
The term ESG stands for Environment, Social and Governance. These are non-financial metrics that investors look for in companies before investing in them.
Are ESG investments good for investors?
Yes. ESG investments could offer benefits such as lower risk and the potential for higher long-term returns.
When was the term ESG coined?
The term ESG was first mentioned in 2004 in a report by a collective of financial institutions of the world, titled ‘Who Cares Wins’.
Are there any disadvantages of ESG investing?
ESG investing has a few disadvantages such as limited investment options, inconsistent and subjective ESG ratings and a lack of standardised metrics for evaluating companies across industries and geographies.
When did ESG originate in India?
The origins of ESG in India can be traced back to 2011 with the publishing of the National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business (NVGs) by the Ministry of Corporate Affairs.
Is ESG investing the same as sustainable investing
No. Although ESG investing is closely related to sustainable investing, they are not identical concepts. In fact, ESG is just a small subset of sustainable investing.
What are the common ESG criteria considered for businesses?
The ESG criteria that are considered when evaluating companies may vary from one credit rating agency to another. Some common criteria include climate change mitigation measures, biodiversity conservation, pollution and waste management, labour practices, board diversity and shareholder rights, among others.
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The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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