Environment Empathy (E): The melting glaciers, rise in average temperature globally have brought before us the pitfalls of global warming. The fast reducing forest cover, major rivers getting polluted, and higher presence of pollutants in air are all examples of ways mankind is neglecting the environment. This has resulted in erratic rainfall, droughts and flooding at the same time in different part of a country. However, all is not lost yet. Measures such as switching to renewable energy, increasing green cover, better waste management and pollution treatment are all ways in which one can protect the environment.
Social Responsibility (S): For running their business, corporates draw raw material and man power from the area in which they operate. While engaging with these resources, it is fair to expect the companies to handle resources in a fair, optimal and in a socially responsible manner. The Companies Act, 2013 mandates spending 2% of net profits towards social responsibility causes. Many Indian corporates have taken up initiatives in protecting the environment, helping the locals by way to providing them with quality education and medical facilities. All of these paves way for an enriching cycle for all the parties involved.
Corporate Governance (G): Corporate governance is all about integrity and honesty of the management. This aspect also has the potential to adversely impact investors’ wealth creation prospects in the long run. Market regulator SEBI has from time to time brought about regulations to be adhered to by listed entities. While some companies comply with the requirements in letter and spirit, there are others which comply only as a matter of compliance. History has time and again shown that strict adherence to good policies result into sustainable growth.
Good deeds are rewarded sooner than later. This applies in business and investing as well. If companies follow good practices, it will eventually translate to higher profits by way of brand building and customer patronage.
One of the best examples of a socially responsible company is that of the Tata Group. The recent example is their initiative to provide rooms at Taj Hotel for healthcare staff members who are at the frontlines of the Covid-19 pandemic. Also, their decision to serve food to medical staff at their work place moved me and several others to prefer Tata products over other products. Over the long run, all of these will result in better profits and more importantly brand loyalty.
Any company which follows ESG over the long term is sure to emerge as a sustainable company. That is the reason ESG investing is also known as sustainable investing.
For a layman, it is very difficult to keep track of these three factors of all the companies listed in India. One can overcome these limitations by investing in an ESG Fund offered by mutual fund houses. Currently there are three schemes in this space – Quantum India ESG Equity Fund, SBI Magnum Equity ESG Fund, Axis ESG Equity Fund. ICICI Prudential is also joining the bandwagon with New Fund Offer opening from September 21, 2020.
The portfolio of an ESG Fund will typically have names from the top 1,000 listed entities. Among these, companies which are engaged in businesses perceived as harmful from a social perspective, such as tobacco, liquor and gambling are dropped. Furthermore, companies which have higher carbon footprint or rely heavily on water such as bottling plants or the ones which pollute air or water are given negative weights or altogether excluded.
In a nutshell, ESG investing is all about investing ethically for our own financial wellbeing in the long run.