Moneycontrol Pro Panorama | ESG investing is catching on. But play with care

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ESG has become the new fad in the financial world. Investors pile into assets that sport ESG credentials with hopes of earning better returns, and financial firms have quickly latched on to the trend. The billions being invested in equity and debt ESG funds have made it the centre of attention in the world of finance and business.

What is missed in this win-win for the environment and business is a focus on the underlying problem it is trying to resolve. That’s why the latest Intergovernmental Panel on Climate Change (IPCC) report serves as a useful reminder of why ESG is really relevant and what it is seeking to achieve. This is the first instalment of the panel’s sixth assessment on the ‘physical science basis’ of climate change.

The headline finding is that global temperature on an average could reach or exceed 1.5 degrees Celsius of warming within 20 years. In the coming decades, at 1.5 degrees, it warns of “increasing heat waves, longer warm seasons and shorter cold seasons” and at 2 degrees, we could see “heat extremes would more often reach critical tolerance thresholds for agriculture and health”. We are already seeing extreme weather events play out all across the world, although one may not be able to draw a direct link between them and climate change.

But the report makes it clear that there is a near-linear relationship between cumulative carbon dioxide emissions and global warming. And, the report says achieving net zero global carbon emissions is required for stabilising carbon dioxide-induced global surface temperature increase, with emissions getting balanced by carbon removal.

This report provides more scientific basis for the governments that have stitched a global coalition of the biggest economies to fight climate change. While developed countries are pushing for quicker and stronger measures, the developing world finds itself in a difficult situation and wants financial assistance from developed countries to switch to a low carbon-intensity economy. There is also the additional challenge for India, which uses taxes on fuel to fund many of its social programmes and it will have to find new avenues of income to fund them.

While governments may be slow to change, the world will put pressure on business and finance to reach a net zero state. The interconnected nature of global business and finance makes this possible. This could mean ensuring that ESG funds are actually investing in companies that fit the criterion, and that companies that claim ESG status actually can show proof of the same. Already, a move is afoot to revamp how companies and funds report ESG metrics. The coming years will see these changes being implemented. Before blindly investing in ESG causes or paying more for ESG stocks, do your due diligence so that you are not caught on the wrong foot.

Today’s FT selection (free to read for Pro subscribers) is on how companies that have bought carbon offsets may be at risk if the assets (such as a forest) they have helped fund are taken down by fires or other natural disasters. It calls for transparency on accounting for carbon reduction by companies, a first step in the goal to reach net zero. It is one thing for all companies to carry statements professing care for the environment and big goals that are 20 or 30 years away, but if this is not followed by action, then it is of little use to a heating planet.

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Ravi Ananthanarayanan

Moneycontrol Pro​