When it comes to investing, as a responsible citizen, one should evaluate our target companies not only based on financial parameters but also on the basis of certain non- financial parameters. For the non-financial parameters, ESG (Environment Empathy, Social Responsibility and corporate governance) can be considered as a good starting point. Here companies are evaluated on the basis of positive and negative contributions they make for the society as a whole. Though the idea of investing on ESG parameter is at a nascent stage in India, but globally this is a well-entrenched concept in the field of investing. Going forward, many believe the younger generation, as a responsible citizen, is likely to play a pivotal role in popularising this concept in India.
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, are the products created by the company sustainable, is natural resources efficiently and how corporates deal with recycling.
Social: This aspect takes into account factors which are both inside and outside the company. It looks in for aspects such as fair lending, is the corporate helping in community development, does the company initiate measures which can ensure diversity and equal employment opportunity while hiring, does the company engage in business/countries where have been under 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 company’s board of directors, responsiveness of the company to shareholders.
Asset 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.
Globally, as of December 2019, there are 3,308 funds which are into ESG Investing. The scheme number a decade back was 1,168. This clearly shows how the acceptance of the funds has panned out in the developed markets. In terms of the inflows into this theme, there was a $154 bn inflows during 2019, which was a marked improvement as compared to 2009 when the inflows were just $21.4 bn.
Domestically, ESG is at a very nascent stage. For an investor looking for an ESG compliant investment today, especially through the mutual fund route, the options are very limited. However, this number is soon to get a leg-up with ICICI Prudential Mutual Fund announcing its New Fund Offer with an ESG mandate which is open from September 21, 2020 to October 5, 2020.
So, if you are an investor wanting to align your values with the investments made and are looking for a sustainable wealth creation, then ESG Fund could prove to be a win-win option.
(The author is the Managing Director of Govardhan Trading Co.Pvt.Ltd. Views expressed are personal)
