ESG investing: The ESG way to build a strong portfolio and also improve the world around you

Call it the new investment currency. The awareness of Environmental, Social and Governance (ESG) factors in the management of companies has continued to grow. Growing inequalities, the need for social justice, better disclosure requirements and the extreme weather conditions that are happening around us have all led to a call to action in more ways than one. It has also catalyzed investments in companies that pay particular attention to environmental, social and governance issues.

Simply put, analysts study a company’s “environmental, social and governance” framework and measure the growth opportunities and risks they face, which are not usually part of regular financial reporting. Today, more and more Indian companies publish ESG information in their annual reports, and some even produce stand-alone ESG or sustainability reports. These reports present initiatives taken to reduce carbon footprint, water and air pollution and include fair labor practices, human rights and ethical business practices.

ESG first appeared in the United Nations Global Compact report published in 2005. The report established the need to integrate ESG factors into capital markets to benefit both companies and investors. Since then, ESG is no longer considered a niche concept. As an investor, using ESG criteria can help you determine a company’s future financial performance.


How can ESG be a game-changer


The future of our environment has become a priority for communities, governments and economies. Problems such as climate change, carbon emissions and deforestation have dire implications. Therefore, to tackle these problems, it is urgent to generate social change, political action and financial support. To drive the overall ESG agenda, regulators have pushed companies towards better disclosure and reporting.

Typically, businesses benefit from economic growth, increased consumption and globalization. These factors have always supported and strengthened the role of businesses as providers of products, services, careers and infrastructure. But in recent times, a company’s contribution to critical sustainability issues such as climate change, biodiversity, human rights and inclusion has also grown.

At the same time, the rise of technology has allowed stakeholders and shareholders to question the way companies act. All of this has led to an increased need for transparent measurement and reporting of sustainability performance. For example, with corporate reporting, you can identify and measure business performance the same way it uses ESG reporting to make the right decisions.


Why invest in ESG


ESG strategies are sustainable and have proven that they can deliver good returns. According to the Morgan Stanley Institute for Sustainable Investing, February 2021 sustainable funds outperformed their traditional peers. The report also revealed how money invested in sustainable companies presents a lower market risk.

According to Bloomberg data, the MSCI India ESG Index consistently outperformed its benchmark, the MSCI India, from May 2011 to March 2021. The Nifty 100 ESG Index also outperformed the Nifty50 and Nifty100 over periods of time. ‘one and five years.


Getting started in ESG investing


Retail investors always have the option of evaluating companies’ ESG initiatives and making direct investments. This could be long and tedious, however, and therefore should be left to experienced fund managers. They have the expertise and tools to jointly analyze financial performance and ESG initiatives in order to make the appropriate investment decisions.

Investing in an ESG fund offered by retail fund managers or life insurance companies can give you the opportunity to seek good returns and have a positive environmental and social impact. These funds use ESG principles and invest in companies that make efforts to protect the environment, are fair and have high standards of governance. Through rigorous research, fund managers identify companies with the right ESG values ​​and invest your money in those companies to generate returns.

Most fund managers today have a clearly defined “responsible investment framework”. Such a framework specifies how they choose to invest in companies that have best ESG practices with an emphasis on governance, which is then monitored through their management policies, exclusion principles and external ESG ratings as well. than an internal evaluation.

With more and more asset managers offering ESG funds as an investment option to retail investors, companies are directly affected. Becoming ESG compliant not only increases their relevance as an investment option, but also allows them to have a positive impact for the well-being of society. As investors are increasingly attracted to ESG-oriented funds, they are making a difference in the way companies operate.

In fact, international investors investing in listed entities in India scrutinize their ESG initiatives very closely and base their investment decisions accordingly. Globally, ESG fund assets under management (AUM) exceed $ 35 trillion. While the concept of ESG funds is relatively new in India, in July 2021, total assets under management stood at around Rs 115 billion.


Millennials are changing the face of investing


Today, a large majority of millennials are aware of environmental concerns, ensuring social equity and good governance, which is likely to guide their investment decisions. This is a win-win situation as it not only provides them with feedback, but also serves as a channel for them to contribute positively to society.

With millennial activism and the push for sustainable investing, it’s time for every generation to consider the ESG investing option. As more and more companies regulate their strategies and establish good corporate social responsibility, ESG investing will pave the way for a sustainable and profitable future.

If you are an investor who values ​​ESG principles, now is the time to embrace responsible investing. ESG investing can be a great way to complement your portfolio with funds that reflect your standards and ethics while providing good returns.


(Jitendra Arora is Executive Vice President of Investments at ICICI Prudential Life Insurance. His views are his own)

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