Fri. Mar 29th, 2024

Steering through various world-level conferences and Representatives’ meets, we have come to know that mitigating Climate change needs multi-pronged action.

It’s progression can just not be tempered through strategic meetings within closed doors, it needs a lot more than that, above all, the clean form of finance to promote the planet’s assets and limit the way it is to be harmed.

Environmental, social and governance (ESG) investing is a methodology that can help divert the money available in markets towards companies making strides to make this planet a better place, than it is.

ESG finds its existence back in UN Secretary General Kofi Annan’s 2004 letter he sent to over 50 heads of large global financial institutions, just to look for ways to integrate ESG into the world’s capital markets.

As an investment Expert explains it well: “At its core, ESG investing is about influencing positive changes in society by being a better investor”.

Following are the exemplary perspectives taken while assessing a firm for its ESG rating:

Environment: The level of impact a company has on its environment: it’s carbon footprint, the quantity of toxic chemicals a company’s manufacturing process involves, ensuring sustainable supply chain or for instance, any environmental smoothening initiative the company has taken.

Social: Company’s social friendliness and compliance within the company and the associated broader community, its understanding of inclusivity raging from LGBTQ+ to the people with disabilities (PwD) or gender equality, racial or regional diversity respected in hiring practices etc.

Governance: It broadly depends on the company’s board and management’s attitude towards bringing in any positive change. This parameter is inclusive of the way a firm’s leadership lets its employees speak, express, freely work on their ideas etc.

ESG in India and the world

There are five immutable stakeholders involved in the creation and flow of this investment: workers, communities, shareholders, customers and the environment.

“Identifying the impact, positive or negative, on these five stakeholders is what should become the measuring stick for quality ESG investing. The rating firms tend to rely on multiple criteria to evaluate each of the individual E, S and G components.”

“This is important for the obvious impactful reasons relating to each stakeholder, but it also can be used to identify the strength and sustainability of the company itself.”

How and why are the above quantities assessed?

“Considering those factors gives investors a more holistic view of companies, which can help mitigate risk and identify opportunities.”

ESG investment comprises of only funding the companies those score high on these statistics, i.e., they fulfil their social and environmental responsibilities more efficiently.

This is to be assessed and quantified by third-party organizations, independent companies and even research groups.

There is a greater requirement for private sector interest and involvement for betterment of the environment and society, in general.

Sustainable financing: Doing well by doing good

“Many clients are very concerned about environmental and social problems, such as climate change leading to more and severe climate crises, gender and racial inequality, data security and privacy.”

“They want to make sure that they don’t invest in firms that exacerbate or contribute to these problems and would rather invest in those, that are champions in leading ESG movements.”

Around the world, major polluters like Royal Dutch Shell and Nestlé, have ambitiously set their emissions reduction targets and even transformed their business strategies, indicating a real impact of Investors and their inclinations in concert.

According to a set of data provided by Morgan Stanley, 85 percent of individual investors, and 95 percent of HNIs (High net-worth Individuals) simply millennials, have shown keen interest in sustainable investing.

Moreover, as per energy experts, investing in this ethical way can help protect an investor from risks and increase the returns. An example can be drawn from the oil price crisis and how such funds remained insulated from its impacts as they remained fossil fuel-free.

How to find such ESG-loving portfolios to invest in?

Who will search these for the potential investors?

One cannot just hunt individual ESG stocks but can rather easily opt for funds in collectives, using robo advisers, financial advisors and even certain organization which segregate the funds based on the values one can respect, be it Gender equality funds, deforestation free funds etc.

It’s exclusion list encompasses freedom from arms, fossil fuels, tobacco, palm oil, nuclear power, military contracting, alcohol, cannabis, adult entertainment, gambling etc.

People always want to feel that their money is going in restructuring the world but when can one be certain of it?

As per several surveys, Investors have demanded transparency in receiving reports depicting returns of their investments made in social and environmental regard.

With advanced technology, one can expect improvements in our ability to measure, evaluate, and monitor ESG perspectives in Business for longer time.

It is acknowledged that firms who keep their environmental, social, and governance (ESG) impacts and risks in track, stand at a better position to make smarter capital allocation decisions.

ESG prospects in India:

Though ESG investing in India has knocked in late but investors have started looking out for socially responsible investments.

A few examples of such sustainable exchange indices are S&P BSE Carbonex; S&P BSE Greenex and S&P BSE 100 ESG, involved with BSE or the NIFTY100 Enhanced ESG Index and NIFTY100 ESG Index by India Index Services & Products Ltd (IISL).

In comparison with Sensex during the pandemic, the performance of the S&P BSE 100 ESG index was far better in all cases; one, three, and five-year annual returns.

As India aligns with ever-evolving global trends, the country needs to imbibe all goodness and sustainability in its investments flowing.

By Alaina Ali Beg

I am a lover of all arts and therefore can dream myself in all places where the World takes me. I am an avid animal lover and firmly believes that Nature is the true sorcerer.

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