By: Ritu Bhandari
Date: February 19, 2022 | 05:21 PM
Snapshot
- Many institutional investors are increasingly including ESG performance and rating in their investment mandates and pledging to reduce the carbon emissions in their portfolios.
What is ESG Investing?
In the backdrop of climate change, ESG (Environmental, Social and Governance) investing is gaining momentum by socially responsible investors.
Environmental Criteria
Related to the preservation of the environment—how a company contributes to air and water pollution, waste disposal, use of renewable energy sources, and other climate change actions.
Social Criteria
Related to employee welfare—fair wages, retirement plans, medical benefits, provident fund, pensions, employee training, diversity, prevention of sexual harassment, inclusion, CSR initiatives, and customer protection.
Governance Criteria
Concerns top-level management practices—safeguarding stakeholders’ interests, transparency in financial reporting, fair executive compensation, and timely disclosures of information and data.
The Top-Down Approach
Institutional investors are increasingly including ESG performance in investment mandates. Morgan Stanley’s survey found that nearly 90% of millennial investors prefer values-aligned investments.
Companies are disclosing ESG metrics, and major ETF providers like BlackRock and Vanguard now offer ESG-focused funds. Robo-advisors like Wealthfront allow ESG portfolio selection.
This trend impacts market valuation, encouraging companies to improve ESG performance and communicate it to ESG rating agencies. Good governance often leads to lower equity costs and higher valuations.
Companies with environmental/social concerns like NTPC (thermal power) and ITC (tobacco) often trade at a discount due to ESG concerns.
Indian Scene
SEBI mandates the top 1,000 listed companies to file a Business Responsibility and Sustainability Report (BRSR) by 2022. These disclosures aid ESG rating agencies and informed ESG investments.
Companies like Larsen & Toubro have focused on cleantech to improve ESG scores, while Infosys formed an ESG committee at board level.
Some Pertinent Questions
- Should India place more emphasis on governance issues like litigation and related party transactions?
- Should companies driving formalisation of the economy or financial inclusion be prioritised in ESG ratings?
- Are consumers willing to bear the short-term cost of environmentally sustainable products?
Renewable energy once costlier than thermal power has now reached grid parity, thanks to scaling and technological advancements, often aided by government subsidies and mandates.
Conclusion
Though still in early stages in India, ESG investing is becoming essential. Investors increasingly want their investments to positively contribute to society, people, and the planet. ESG is no longer just a choice—it’s becoming a necessity.