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ESG: A new formula for investing success?

Have you read the RBI’s report on currency and finance, warning that India’s CO2 emissions could rise from 2.7 gigatonnes in 2021 to a staggering 3.9 gigatonnes by 2030? That’s a lot of carbon, isn’t it? 

But, the RBI has a plan. They recommend a policy mix that includes a carbon tax of $25 per tonne, a gradual increase in non-fossil fuel usage, the use of electric vehicles, and green hydrogen production. 

Are you wondering how this is related to finance and investments? Well, today we are talking about ESG and its role in investing.

What is ESG, and why should we care?

In today’s world, we all want to make a difference and live in a sustainable environment. But have you ever thought about how the companies we invest in are doing their part? That is where ESG comes in.

The full form of ESG is Environmental, Social, and Governance, and is used to evaluate a company’s sustainability and ethical practices. These factors are broken down into three main categories:

Environmental: This includes a company’s carbon footprint, waste management, and resource conservation.

Social: This considers a company’s impact on employees, customers, and the community. It includes labour practices, diversity and inclusion policies, and philanthropy.

Governance: This looks at a company’s leadership and management practices, including board diversity, executive compensation, and shareholder rights.

The rise of ESG

ESG has been gaining popularity in recent years as consumers, investors, and regulators demand more accountability and transparency from companies. A 2020 survey found that 71% of millennials are more likely to buy from companies that align with their values.

ESG was first introduced in 2004 with the publication of “Who Cares Wins,” a report by a group of 18 banks and investment firms recognised by the United Nations. Since then, ESG has become a crucial framework for assessing a company’s overall performance and sustainability.

What is ESG investing?

ESG in India is especially significant where the government is pushing for sustainable development and social responsibility. The Securities and Exchange Board of India (SEBI) recently made it mandatory for the top 1,000 listed companies to disclose their ESG initiatives.

But ESG investing is not just for big corporations. Individual investors can also incorporate ESG into their investment strategy by choosing mutual funds or exchange-traded funds (ETFs) that prioritise ESG.

So, the next time you think about investing in a company, remember to ask yourself: What is their ESG score? Are they making a positive impact on the world? And most importantly, do their values align with mine?

Recent SEBI guidelines

SEBI mandated that the top 1000 listed companies by market capitalisation must report their ESG data as per the requirements of the Business Responsibility and Sustainability Reporting (BRSR) starting from FY 2023.

Additionally, SEBI has mandated asset management companies (AMCs) to provide disclosures on votes cast on resolutions of ESG issues. This move is also favourable for the investor community that is keen to invest in green, sustainable, and impact funds.

What is an ESG index?

An ESG index is a stock market index that includes companies with high ESG scores. ESG indices can be used by investors to create socially responsible investment portfolios. They are designed to track the performance of companies that meet high ESG standards.

ESG indices typically use several factors to determine which companies to include. These factors may include:

Environmental performance: Companies with strong environmental performance, such as those with low carbon emissions or sustainable supply chains.

Social performance: Companies that have positive social impacts, such as those that promote diversity and inclusion or have strong labour practices.

Governance performance: Companies that have strong governance practices, such as those with transparent decision-making processes or independent boards.

Is ESG the real deal or just a marketing gimmick?

The challenge of ‘Greenwashing’

Unfortunately, not all companies that claim to be sustainable are. Greenwashing, or using false or misleading information to market environmental responsibility, is a real problem. Studies have shown that many ESG funds include companies that are far from being socially and environmentally responsible.

Challenges faced by companies

Implementing ESG policy can be challenging for companies. Some of the obstacles they face include:

Limited awareness: Many companies don’t fully understand what ESG is or how to implement it.

Inadequate resources: It takes time, money, and expertise to integrate ESG considerations into business practices.

Varying data: There is no universal standard for ESG reporting, so data can be difficult to compare.

Emerging regulations: Guidelines and regulations surrounding ESG are still evolving.

Not all funds claiming to be ESG-friendly are doing so. Challenges remain. However, this is a new and growing investment approach. So, the next time you’re considering where to put your money, think about how ESG factors into the equation.


What is the meaning of ESG funds?

ESG funds are mutual funds that invest in companies that meet specific environmental, social, and governance (ESG) criteria. These funds aim to generate returns while promoting sustainable investing practices and making a positive impact on society and the environment.

How is ESG implemented in India?

ESG compliance in India is still evolving. It is regulated by multiple bodies and acts like the Companies Act, 2013, the Securities and Exchange Board of India, etc.
The last financial year (2022-23) was the first year for mandatory ESG reporting by the top 1,000 companies in India. So, India is at a nascent stage for ESG implementation. The regulators have been quick to identify some of the loopholes and are taking well-thought-out steps to plug them at the earliest. 

What are the impacts of ESG risks?

ESG risk refers to the possibility that a company’s operations or products may cause harm to the environment and society or lead to governance issues. ESG risk can impact a company’s financial performance, as well as its reputation. Investors evaluate ESG risk in several ways, such as:
Conducting ESG audits, looking at ESG scores, analysing sustainability reports, etc.

What is the ESG score in India?

ESG scores help in measuring a company’s performance in the three aspects – environmental, social, and governance. Different rating agencies use different methods to calculate the score. ESG metrics use algorithms and scorecards based on the sustainability reports and related information available in public portals. Some industry-specific aspects like carbon emissions and water consumption patterns are also used while calculating the ESG score.

What is impact investing?

Impact investing in India is a concept that is often misunderstood as ESG investing. There is a thin line between impact investing vs ESG investing.
Impact investing is where the objective of the investment is to create a positive impact on society. It may be through social impact investing, environmental impact investing, or other forms.
ESG investing, on the other hand, is a framework to ensure that the environment, society or the government is not harmed in the regular course of operations.

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