Sustainable investing with ESG may create better shareholder value

Sustainable investing is the in-thing globally, and the trend is slowly making its way into India. The buzzword — ESG – Environmental, Social & Governance. These are key indicators that assign a numeric score to a company’s moral compass beyond financials.

Listed companies may choose to follow Global Reporting Initiative (GRI) standards that, in addition to financial reports, also assigns sustainability scores across some 150 parameters. Companies with high ESG scores are considered more sustainable than those with low ESG scores, and in the long run are more likely to create better value for shareholders.

“In simple terms, ESG investing can be termed as investing in companies that focus on the planet, it’s people and profits. Together, any company that inculcates these three Ps into its core corporate structure would tend to have a competitive advantage over others, which in turn, in the long run, translates to sustainable profits,” said Swarup Mohanty, CEO, Mirae Asset Investment Managers.

ESG – An idea ahead of its time?

ESG investing has gained traction in recent years. The phenomenon started in Europe, followed by Canada and the US before gradually making its way into Japan and South Korea. As Indian retail investors begin to understand sustainable investing, experts believe the trend will catch on here too.

“Indian investing fundamentally revolves around the financial statements of the organization. But ESG is beyond just financials. Mark my words, it is coming in and it is coming in very, very quickly. When that happens, practically every company will have to adapt it in a certain way or in a total way. The larger companies will take it first. But if people have to survive the capital markets or play in the capital markets in both equity and debt in raising money, the ESG score will become mandatory sooner than later,” said Mohanty.

ESG Mutual Funds 

Since 1st February 2021, India has seen 11 mutual funds NFOs, including Invesco India ESG Equity Fund. It is not the first and definitely not the last. ESG funds create a portfolio of companies with high ESG scores for investor money to flow into. This way, investors get a variety of ESG companies in their portfolio through a single mutual fund.

National Stock Exchange also has an ESG index – the Nifty 100 ESG – that serves as a a barometer to gauge the performance of high ESG companies. This index has beaten the benchmark Nifty 50 index as well as the broader Nifty 100 index over the two year return period (since data has been made available on NSE).

Mirae Asset Investment Managers has also created an open-ended index fund that tracks the ESG index. “ESG research is outsourced in India. There is no in-house ESG research and our research is outsourced to Sustain Analytics, which is one of the largest ESG research providers globally. So our thought was, if we are going to outsource research, we would not like to come on the active space with that particular product. So we are really happy to tell you that our ESG fund – Mirae Asset ESG Sector Leaders Fund is the first and only passive fund in the market. And we are very happy to have started that trend in India,” said Mohanty.

Should you invest?

Experts believe the time is ripe for ESG investments to make small inroads in your portfolio, but tread with caution.

Vishal Dhawan, Founder, Plan Ahead Wealth Advisors said, “ESG funds in India are a relatively new concept in India, though overseas they have started to deliver returns that are higher than non ESG funds. The relative safety of an equity fund comes from being invested for a 7-10 year investment horizon, and thus investors could consider allocating about 10%of their portfolios to ESG funds considering their track record overseas for the long term, and wait for more data to be available on these performances in India before allocating any more.”

According to Feroze Azeez, Deputy CEO, Anand Rathi Private Wealth, ESG is gaining momentum but will not outperform the other themes over the next 2-3 years.

“It is an interesting concept and investors may choose to go ahead with responsible investing, but it is not a return-spinner yet,” he told Money9.