ESG Investing: The Future of Sustainable Finance in India

ing In a world increasingly conscious of choices, from eco-friendly products to sustainable fashion, green investments have taken center stage. The term “what is ESG investing” is being tossed around more frequently among seasoned investors, sparking curiosity among newcomers.

In this article, we will explore what ESG investing is, why it should be on your radar, and which ESG funds are making waves in India. We’ll also tackle the contentious issue of greenwashing and how to navigate it while making informed financial decisions.

What Is ESG Investing?

Understanding ESG Investing

ESG investing, short for Environmental, Social, and Governance investing, goes beyond conventional profit-centric investment approaches. It encompasses non-financial factors such as sustainability, inclusivity, and fairness in a company’s operations.

At its core, ESG investing prioritizes ethical practices alongside profits. To fully grasp what ESG investing entails in India, let’s break down each letter of ESG:

Environmental (E): This aspect focuses on adopting end-to-end sustainable practices throughout a product’s lifecycle, from production and operation to marketing and disposal. It encompasses managing carbon emissions, reducing ground pollution, responsible waste management, energy efficiency, promotion of recycling, green transportation, and wildlife conservation.

Social (S): The ‘S’ in ESG pertains to a company’s social responsibilities towards stakeholders such as employees, customers, suppliers, and the broader community. It includes ensuring employee welfare, promoting equality and diversity, providing healthcare, safeguarding human rights, nurturing vendor relationships, and more.

Governance (G): Corporate governance is the essence of ‘G’ in ESG. It involves addressing issues like shareholder rights, health and safety standards, legal compliance, and adherence to ethical business practices.

ESG Score: The Ethical Compass

In the world of ESG investing, an ESG score acts as a moral compass. Think of it as a credit rating, but instead of assessing creditworthiness, it evaluates a company’s ethical performance based on environmental, social, and governance practices. While governments don’t issue these scores, numerous private agencies provide them.

In traditional investments, integrating ESG scores isn’t common. So, what is ESG investing, you might wonder? It’s an investment approach that factors in environmental, social, and governance considerations when evaluating companies.

A higher ESG score indicates that a company excels in ethical practices across these three dimensions, while a lower score suggests room for improvement. Companies with lower ESG scores may face future risks due to the adverse effects of climate change.

3 Compelling Reasons to Start ESG Investing

1. Higher Returns in the Long Run

Government incentives for renewable energy usage have led to cost savings for companies, translating into higher profitability. Recent studies indicate that environment-compliant companies tend to outperform non-compliant counterparts in the long term.

2. ESG in India: A Growing Frontier

ESG is still in its early stages in India. A decade ago, ESG investing was relatively unknown, but today, there are nine ESG funds available. Moreover, institutional investments in ESG funds reached a staggering $7.9 billion in 2022, post-COVID. The growth trajectory is remarkable, making it an exciting time to explore ESG investing in India.

3. Environmental and Financial Returns Combined

Millennial and Gen Z investors look beyond financial performance; they want their investments to contribute to meaningful causes, especially in addressing climate challenges. ESG investing dispels the myth that ethical principles come at the cost of profits. Surprisingly, ESG indexes have outperformed Nifty Indexes in recent years.

ESG Investing: The Fundamentals

Demystufying ESG Funds

ESG funds fall under various investment categories, including sustainable investing, impact investing, and responsible investing. These funds invest in the stocks or bonds of companies that align with ESG (environmental, social, and governance) parameters. These parameters gauge a company’s impact on the environment, society, and its corporate governance practices.

ESG fund managers prioritize companies with higher ESG scores and assess their financial returns before making investment decisions.

The Evolution of ESG Funds in India

A decade ago, if you had asked about ESG funds in India, the response would have been silence. The journey began in 2018 when SBI repositioned its SBI Magnum Equity ESG Fund, originally initiated in 2013. Around 2020, more than five other fund houses joined the ESG race and launched their ESG funds.

This proliferation prompted SEBI to act swiftly, making it mandatory for companies to publish their annual Business Responsibility and Sustainability Reports starting in 2023. Prior to this mandate, companies were not obligated to disclose BRSR reports in their annual filings.

The influx of global investors, institutional investors, and high-net-worth individuals into ESG funds is making green investments more accessible to retail investors. To better understand ESG investing in India, it’s crucial to explore its applicability and operations within the Indian context.

What ESG Funds in India Consider Before Investing

ESG funds in India typically use the NIFTY 100 ESG TRI as their benchmark. ESG funds prioritize not only financial performance but also the ESG scores of the companies they invest in. To be listed on ESG indexes, companies must meet certain criteria:

• ESG Score: Companies must have a discernible ESG score.
• NIFTY 100: The company must be part of the NIFTY 100 index.
• Controversy-Free: The company must not be embroiled in any significant controversies.
• Avoidance of Specific Industries: Companies engaged in gambling, tobacco, and alcohol-related businesses are typically excluded.

As of now, India boasts nine ESG funds. As the one-year returns vary between 1% and 10%, it’s important to consider a longer investment horizon for more substantial returns. However, if you’re keen on investing in environmentally conscious companies, various platforms offer opportunities to invest in solar rooftop projects worldwide, with the potential for annual returns of 10-15%.

The Dark Side of ESG Investing: Greenwashing

Unmasking Greenwashing

The table above reveals that most ESG funds were established around the same time, hinting at a race to capitalize on the green investment trend. This competitive landscape has raised concerns about greenwashing.

Greenwashing occurs when asset managers feign commitment to ESG parameters but primarily use them as marketing tools to attract investors. Some companies have similarly made false sustainability claims while engaging in unsustainable practices, masquerading as environmentally friendly entities.

Notable global brands, from Coca-Cola to Volkswagen and fast fashion giants like H&M, have faced accusations of greenwashing. Experts assert that India, too, requires robust regulations to scrutinize false sustainability claims made by companies.

FAQs:

Why should I consider ESG investing in India?

ESG investing in India offers several advantages:

• Alignment with Values: ESG investing lets you align your investments with your values and contribute to positive social and environmental change.
• Risk Management: It can lead to better risk management by considering non-financial factors that can impact a company’s long-term performance. ESG-focused companies often demonstrate strong corporate governance practices, enhancing shareholder value.

What are some key ESG factors considered in India?

In India, key ESG factors considered in investments encompass:

• Environmental Aspects: These include carbon emissions, resource efficiency, waste management, and renewable energy usage.
• Social Factors: These encompass labor practices, diversity and inclusion, human rights, community engagement, and product safety.
• Governance Factors: Governance factors focus on board composition, executive compensation, transparency, and anti-corruption measures.

Conclusion:

In a world where sustainable products and inclusive practices are imperative, ESG investing emerges as a compelling path forward. As an investor, it’s essential to fact-check companies and scrutinize their sustainability claims. Look for relevant certifications that validate their green practices.

Encouraging practices that heal the planet and create a better future compels us to invest in ESG funds. ESG investments not only offer long-term returns but also align with your values. Understanding what ESG investing entails could be your opportunity to redefine the narrative that profit is the sole driver of investments.

Consider investing in companies whose operations you can genuinely verify. Various platforms provide an innovative and transparent sustainable investment approach, allowing you to fact-check everything from power purchasing agreements to financial documents and due diligence. ESG investments offer a low-volatility investment avenue with the potential for better returns than fixed deposits or mutual funds.

Embark on your green investment journey today, and become a part of the positive change the world needs.