The COVID-19 pandemic has indeed amplified the demand for ESG (Environmental, Social and Governance) investing across the globe, with the younger generation of investors becoming more vocal and interested in what’s affecting the world, and considering corporate contributions to society as a parameter for investment decisions.
As per a recent MSCI 2021 Global Institutional Investor survey, around 79 percent of investors in Asia significantly increased their investments in such funds, allocating over $5 billion to them in the last leg of 2020. This marks the region’s total at $25.4 billion, an almost 131 percent rise from 2019.
In fact, ESG assets have grown at about 22 percent per annum since their inception in 2006 with the formation of the PRI (Principles of Responsible Investing) network. And with Indian business giants like Reliance, Adani, and Tata pledging to go green, the momentum for ESG investing is indeed high at the moment.
What are ESG Funds?
The world is increasingly waking up to environmental issues, social concerns, and the need for transparent governance. Human rights, energy consumption, climate change, and pollution control have gone beyond being merely talking points to defining responsible investing. Under ESG investing approach, investors don't just consider the company’s financial performance, but rather view the company comprehensively in terms of its environmental, social, and governance practices.
This makes the company’s bottom line as important as its community welfare and environmental initiatives and management integrity, if not more.
Says Prateek Singh, founder, LearnApp, “ The pandemic has only put into perspective the demand for sustainable investing. In 2020, 6 ESG funds were launched in India, taking the net inflow in ESG funds to almost Rs 678 crore in March 2021 from merely Rs 68 crore in March 2020. The strong inflows speak of the growing investor interest in ESG issues in India in the coming years and the numbers are bound to increase.”
Latest announcements from Reliance, which aims to become a net carbon zero company by 2035 and has specifically allocated Rs 75,000 crore for capital expenditure on new energy have fuelled ESG positivity in the country.
But acceptance for ESG in the country dates to the last decade, when, in 2020, SEBI mandated Business and Responsibility Reporting as voluntary till 2022 and compulsory from 2023 for the top 1,000 listed companies in the market. Despite its optional status, four of five Nifty companies make public disclosures about their ESG practices. Around 41 out of 50 companies go a step ahead and provide detailed ESG reports, which is a nod to the increasing importance investors have started placing on a company's societal contribution.
Chirag Mehta, Senior Fund Manager, Quantum Asset Management, underlines the importance of ESG funds in recent times. “ESG funds are amongst the fastest growing investment approaches globally, with almost 25 percent of institutional investors now branded as ESG. However, what needs to be noted is that the universe of ESG compliant companies needs to be in-depth ground-level research as opposed to just “tick the box” research. Excellent ESG standards can function as a guide to a company’s overall quality of management and long-term sustainability."
CRISIL also launched its ratings for around 225 companies on ESG parameters, concluding that high ESG scorers tend to outperform their sectoral counterparts by almost 9 points, on average. While IT and financial services score very high on the compliance scale, given their limited reliance on natural resources, companies in the chemical, oil and gas, metals, and mining sector are at an automatic disadvantage due to their fundamental reliance on environmental resources. Thus, they score low on this front.
In fact, as per a study by Value Research, 9 out of 10 companies that are a part of every ESG fund in the country belong to the financial (HDFC, Kotak Mahindra, ICICI, Axis) or technology sector (TCS, HCL, Infosys).
However, it is important to take information around ESG funds with a pinch of salt, since there is a lack of standardised data and institutional procedures around these parameters, which can often make it hard for investors to gauge the company’s contributions.
Moreover, being a qualitative factor, there are no clear black and whites for what should qualify under this category. A technology major may have made giant leaps in terms of making their workplace more diverse and inclusive but has norms that violate data privacy. How would you evaluate such a company?
Moreover, this qualitative data requires resources and expertise to be mined, something not all fund houses have. One must also remember that good ESG practices can be a causal factor for stellar performance and not the sole reason. Experts suggest that individual investors can find it hard to discern amongst ESG compliant companies and hence, should stick to market guidance for the same.MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.