ESG: Redefining Sustainable Investing

Finding its way into the world of financial management and investments in the 1960s, and having been derived from socially responsible investing (SRI), ESG i.e. Environmental, Social, Governance provides an opportunity for investors to place their money with their values and reap the benefits. Employing these non-financial factors, to analyse and identify risks and growth opportunities, investors are supporting the economy and the environment, as companies are
innovating new products and services on these standards.

Let’s break down the criteria the ESG standards cover for investors to evaluate their investments by -:

Environmental, is based on environmental stewardship that encompasses the responsible use and preservation of nature. It includes a company’s carbon footprint, waste management, and energy efficiency, among other things.

Social, assesses the company’s working relationship with suppliers and business partners, its corporate structure, and its standing in the local community.

Governance, alludes to how a company manages its finances, leadership, board composition, code of conduct, transparent accounting methods, and it’s shareholder rights.

There is no exhaustive list of ESG examples because these factors are often interlinked, thus it is difficult to classify them, but the CFA Institute has effectively broken them down as follows:

Environmental Conservation of the natural world	Social Consideration of people and relationships	Governance Standards for running a company
Climate change and carbon emissions	Customer satisfaction	Board composition
Air and water pollution	Data protection and privacy	Audit committee structure
Biodiversity	Gender and diversity	Bribery and corruption
Deforestation	Employee engagement	Executive compensation
Energy efficiency	Community relations	Lobbying
Waste management	Human rights	Political contributions
Water scarcity	Labour standards	Whistleblower schemes

Impact of ESG on the Investment Landscape

Businesses and investment models are being revamped to include the ESG framework, to achieve the best outcomes.
The rise of ESG has put pressure on the government to integrate ESG factors in long-term investments like pension funds.
From sustainability linked loans to catastrophe bonds and green assets, investment firms are finding ways to offer innovative financial instruments.
We are seeing a rise of Universal Owners, who are asset owners with large investment portfolios that make them owners of a portion of the entire economy and the financial market. Sustainable investing is vital to the performance of universal owner strategies as the overall conduct of the investment portfolio is dependent on the economic performance rather than by the return of individual assets or sector exposures.

ESG Investment Scenario in India

The Indian market is gradually gaining momentum towards the global trend of ESG. But there are obstacles hindering the overall progress and wide adoption in the market.

There is a lack of clarity and understanding about what comprises the ESG terminology. Inconsistency and discrepancies in the metrics have led to differences in data collection, analysis and rating methodology by ESG rating agencies.

To overcome this, asset management companies have to take the lead in creating awareness among investors, and the government needs to implement more host policies and regulatory initiatives to drive home the ESG investment philosophy.

Conclusion

ESG investing is soon going to become the new normal; companies are looking to integrate ESG standards into their businesses in anticipation of mandatory requirements, and with increased competition in the market, many growth opportunities abound. The world is changing and it’s time to invest in the betterment of mankind.