ESG Investing - What It Is and Why It Matters for an Emerging Market Investor
Some investors don’t believe in profitability alone.
They also want their investments to give them ethical satisfaction.
ESG investing rose this belief.
ESG investing taps into markets that prioritize environmental (E), social (S), and governance (G) aspects.
Some call it the future of responsible investing.
In this article, we’ll be covering -
- What is ESG Investing?
- Why is it growing in popularity?
- How is it reshaping the global financial landscape?
If you're an investor keen on aligning your financial strategies with your values, then you should definitely learn more about ESG Investing. It's not only about making ethical choices; it's about ensuring sustainable returns in a rapidly changing world.
Curious about how ESG Investing can redefine your portfolio? Let’s dive in.
What Is ESG Investing?
ESG investing refers to an investment approach that takes into account 3 main factors when assessing the sustainability and ethical impact of an investment in a company or business:
- Environmental (E)
- Social (S)
- Governance (G)
The Environmental (E) aspect of ESG considers how a company impacts the natural environment. It includes things like a company's energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For instance, a company that has a high carbon footprint or is involved in deforestation activities may score poorly on the 'E' factor.
The Social (S) aspect of ESG looks at how a company manages relationships with its employees, suppliers, customers, and the communities where it operates. It might evaluate issues related to worker health and safety, labor relations, diversity and inclusion, product safety, data security, and human rights. A company that, for example, has a history of labor violations or engages in controversial sales practices may score poorly on the 'S' factor.
The Governance (G) aspect of ESG evaluates a company’s leadership, executive pay, audits and internal controls, and shareholder rights, among others. It might look at matters like the company's corporate structure, board composition, political contributions, and any controversies involving the company's executives or board members. A company with a lack of transparency in its financial practices or with a history of unethical corporate behavior may score poorly on the 'G' factor.
So basically, ESG Investing accounts for these non-financial factors and how it may impact the financial performance of a company.
However, it’s important to note there’s no standardized scoring system for ESG investing. Different rating agencies or research firms can evaluate and score companies differently based on ESG factors. This is challenging for investors to make accurate comparisons without conducting thorough research.
ESG investing is an approach to sustainable and socially conscious investing practices.
How ESG Scoring Works?
ESG Score is in the range of 0 to 100, which will act as a parameter to judge the extent of a company’s environmentally and socially sustainable actions.
The key factors which are used to get the scope are environment, society and governance. As long as the ESG score of a particular company is high, you can trust it to provide you with the best returns, and that too ethically.
Some Statistics Regarding ESG
Now that we understand a bit about ESG investing, we will look at some statistics that will help you understand its importance.
- Up until 2020, 88% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately owned companies had taken ESG as an initiative in their environment.
- Most of the small and mid-cap funds are using different ESG standards like UN SDG, GRI, or SASB. The proportion is nearly 1 out of 5 i.e. 18.5%!
- As per The Climate Pledge, more than 200 companies have signed their pledge. The goal here is to reach the Paris Agreement target of net zero carbon a decade earlier.
- According to PwC, 76% of consumers are not going to invest in companies or buy their products if they don't take proper care of the environment, their employees, or the community.
- As per the report by McKinsey, creating efficient ESG strategies can affect operating profits by up to 60%
As you can see, ESG Investing has evolved nicely. It's so much so that ESG has become a necessity, on the part of the company as well as the investor.
Reasons To Invest In ESG Funds
As an emerging market investor, you must be curious to understand why ESG funds need to be focused on.
1. Less Risk
If a company is focusing on ESG practices, it is in a better position to manage risks as well. Such a company will keep all the environmental, social and political aspects behind before deciding on its business. So the legal and reputational risks are going to die down.
As far as the stock market is concerned, it is a game of reputation. If a particular stock or fund has a good reputation, it is always going to make money and bring returns to its investors.
2. Growing Demand
We have already given out stats regarding how ESG stocks are being demanded all over the world. It is also the need of the hour. So if a company is focusing on its ESG prospects, it will have a better chance to make profits as well.
The value of these funds and stocks will improve shortly, giving you more reasons why you should opt for ESG investing as a new investor.
3. Long-Term Returns
The potential of ESG capital is such that it will bring you long-term returns. It is because ESG has the potential for the future. The focus on environmental, social and governmental factors is not just the current need of the hour, they will also be required to be kept in mind in the times to come.
ESG investing is going to bring you returns in the long run, giving you a better position to weather risks and take advantage of opportunities.
List Of ESG Funds In India
There are various ESG funds in our country that are providing great returns to investors. Let's look at some of the top funds in India:
1. Aditya Birla Sun Life ESG Fund
It was launched in 2020 to earn long-term capital appreciation by investing in a diversified basket of companies following the Environmental, Social and Governance (ESG) theme. The minimum investment here is a mere Rs. 500, making it a perfect platform for a new investor to start his journey.
Returns
- 1 year - 8.81%
- Since Launch - 11.32%
2. ICICI Prudential ESG Fund
With a fund size of around Rs 1300 crores, it is safe to say that this fund is making huge moves in the market. It was also launched in the year 2020 and has provided an impressive return of around 16% ever since. The expense ratio of the funds stands at 2.71%.
Returns
- 1 year - 16.81%
- Since Launch - 15.99%
3. Axis ESG Fund
Just like most of the names on this list, it was also launched in the year 2020. The focus is to grow keeping the environmental, social and governmental factors in mind. The returns of around 15% since launch means that it has been quite successful till now. The fund size is Rs. 1,482.97 crore while the expense ratio is at 2.15%.
Returns
- 1 year - 7.67%
- Since Launch - 14.63%
4. Quantum India ESG Equity Fund
It was launched a year before the above 3 names on this list in 2019. The returns have been solid ever since, standing at around 16.58%. The minimum investment, as well as the minimum additional investment, is Rs 500. On top of that, the expense ratio is 1.72% with the category average of 1.83%.
Returns
- 1 year - 11.29%
- 3 years - 20.26%
- Since Launch - 16.36%
5. Kotak ESG Opportunities Fund
The best part about investing in this fund is its minimum investment requirements. You only need to spend Rs 100 to start your ESG investing journey with this fund. The returns are solid with over 10% since its launch. The assets under management also stand at Rs. 1,098.78 crore. The expense ratio is at 2.15%.
Returns
- 1 Year - 13.38%
- Since Launch - 10.51%
Challenges Regarding ESG Investing
No matter if you're an emerging market investor or an established one, you will have to face several challenges in your way. Let's take a look at some of them here:
1. No Quality Data
As we have seen through the funds mentioned above, ESG investing has just started in the last few years. So if you want to find accurate ESG data regarding a company, the work is quite tedious. Moreover, the chances are high that the data is inaccurate.
2. Traditional Mindset
As you know, most of us are resistant to change. Therefore, some of the investors won't even like to approach ESG investing in the first place. As long as they are getting returns from the normal stocks and funds, why bother trying something that has little history and less guaranteed returns?
3. Absence Of Measurement Standards
While data collection regarding ESG investing is possible, there's no standardization to it. We only use different names such as impact investing, sustainable investing, socially responsible investing, and responsible investing to know about ESG investing.
It is about time that certain standards and methodologies are used to increase the accuracy of ESG Data.
Bottomline
As a new investor, you might look for enough reasons to make your investment decisions. The same can be said about ESG investing as well. This type of investment can help you in the ways such as:
- Businesses with good ESG practices have better reputations, thus more demand for their stocks and shares in the marketplace
- It is not only good for your pocket but for the environment as well
- It makes you feel right about your investment decisions as you sit on a higher moral ground
According to a poll by Morning Consult, 69% of expert US investors believe that ESG investing is profitable, one way or the other. So even if you're a new investor, you can consider it a safe bet!
To stay updated on the latest in ESG investing, consider downloading the INDmoney app that regularly shares insights and data on this trend.
How much money is required to be invested in ESG funds?
It depends upon your needs and requirements. You just have to check the minimum requirements for investment in a particular ESG fund and invest accordingly.
Do ESG funds bring consistent returns?
Multiple ESG funds have generated decent and consistent returns since their launch. However, investing in these funds is subject to market risks so you should do your thorough research before investing.
Do we have to hire an expert to do ESG investing?
It depends upon your ability to understand ESG funds that are available in the marketplace. If it's getting confusing, it is better to hire an expert for the job.
Are ESG funds meant for short-term or long-term?
You need to have a long-term objective through ESG investing. Since the ESG requirements are going to increase in future, you should keep your eye on the future as well.
Is ESG investing more profitable than normal investing?
If a company is focusing on ESG practices, it is also earning a good reputation in the market. If it's earning a good reputation, the demand for its shares is bound to go high. So you can consider it to be more profitable than normal investing!