Esg Investing: The New ‘Conscious Option
Santosh Joseph
Partner
Germinate Wealth Solutions LLP
ESG investing is a terminology which has created waves across the globe. However, it is yet to catch investor attention in India. ESG stands for ‘environmental’, ‘social’ and ‘governance’ and ESG investing entails researching and factoring in ESG parameters in addition to the usual financials when evaluating potential stocks for your portfolio. Research over the past several years across developed markets has increasingly indicated that this investing method can reduce portfolio risk and generate competitive investment returns. The other added advantage is that investors can feel good about the stocks they own as they are a part owner of a company which is positive to the environment and people around at large.
Pillars of ESG
Given the three parameters under consideration, ESG investing is also known as sustainable investing. It helps an investor generate sustainable returns over the long term while adhering to the three pillars of ESG investing.
✓ Environmental: This factor takes into consideration how a company mitigates its greenhouse gas emissions and whether the products created by it are sustainable with efficient use of natural resources. It also takes into account how corporates deal with recycling.
✓ Social: This aspect takes into account factors which are both inside and outside the company. It looks at aspects such as fair lending and whether the corporate is helping in community development. It also considers whether the company has initiated measures which can ensure diversity and equal employment opportunity while hiring and whether the company engages in business or countries which have been under the scanner due to human rights issues.
✓ Governance: Corporate governance takes into consideration matters related to a company’s leadership and board. Some of the points of consideration include a check on whether executive pay is reasonable, diversity in the company’s board of directors, responsiveness of the company to shareholders, etc.
Lowering Risk
A report by the Morgan Stanley Institute for Sustainable Investing shows that sustainable or ESG funds have consistently succeeded in lowering downside risk as compared to other traditional funds. More interestingly, this was the trend seen across asset classes. During turbulent markets, such as in 2008, 2009, 2015 and 2018, the study shows that traditional funds had significantly larger downside deviation than sustainable funds, meaning sustainable or ESG funds had a lower potential for loss.
Rise of Conscious Investors
Assets under management in ESG products have grown exponentially in recent years and there are a variety of reasons why this has panned out. Industry observers believe that millennials in general are conscious investors. They are looking out for ways to align their values and their investing habits. As a result, they are mindful of the company they work for or are associated with, the products they purchase to meet their daily needs and finally their investment portfolios. Corporates too are taking note of this and have begun reshaping various aspects of how business works. The biggest fallout of this shift in attitude can been seen in the fact that companies are increasingly willing to incorporate ESG strategies into their business models while trying their best to steer clear of controversies which may be environmental or societal in nature. And finally, this trend has caught the eye of financial institutions too as millennials form a key part of their investor demography.
ESG Fund Globally
As per a Moody's Investors Services report, ESG investing is a value proposition asset managers are able to deliver clients unlike the promise of delivering consistent outperformance. The report further found asset managers which incorporate ESG strategies in their product range show above average organic growth. Globally, as of December 2019, there were 3,308 funds which were into ESG investing. This number was 1,168 e decade back. This clearly shows how the acceptance of the funds has panned out in the developed markets. In terms of the inflows into this theme, it amounted to USD 154 billion during 2019, which was a marked improvement as compared to 2009 when the inflows were just USD 21.4 billion.
ESG Fund in India
The concept is at a very nascent stage here in India. As investor awareness of this type of investing will improve and as seen in the western world when conscious millenials will start entering the capital market fold, the demand for ESG-based products is likely to gather traction. As of now, within the mutual fund space as well, there are hardly three funds which have ESG as a mandate and the oldest one among them started business in May 2018. So, if you are an investor wanting to align your values with the investments made while looking for sustainable wealth creation, an ESG fund could prove to be a win-win option.
The writer is a Partner, Germinate Wealth Solutions LLP Email id : santosh@germinatewealth.com Website : www.germinatewealth.com