Covid-19 has been the inflection point for rewarding sustainability. Companies that rank high on the ESG scoreboard have outperformed those that have a lower score. ESG stands for Environmental, Social & Governance — parameters that define the non-financial future health of a company.
The ESG scoring mechanism is industry-agnostic and assigns a numeric value to the sustainability quotient, beyond the traditional remit of financial numbers alone.
World over, the triple bottom line philosophy of creating value for all stakeholders (society) and not just shareholders has been an abiding principle for most bluechip companies. The three Ps of Planet, People & Profits have been an unsaid barometer for sustainable growth.
Data now suggests that high-ESG scoring companies have also given better returns to investors. The Nifty 100 Enhanced ESG index outperformed the benchmark Nifty 50 returning 47.95% to investors against the latter’s 43.10%. The delta is similar even over a two-year period.
Today, investors can choose from a variety of mutual funds – some active and some passive – to invest their money indirectly into the ESG category of stocks. It should be noted, though, that historic data for the ESG segment is not as robust because ESG score disclosures are yet not mandated by law. There is also some debate on what product categories would be considered non-ESG (tobacco, alcohol, etc).
Investors must note that five out of the eight ESG funds active in India were launched between October to December 2020 when Covid-19 had ushered in a new focus on people and the planet.
While it is not mainstream yet, the ESG trend is slowly gaining momentum. Fund managers and investment advisors believe 2021 will be the year of sustainable investments. The rising number of funds investing in the ESG category tell this story too. Globally, Assets Under Management (AUM) under sustainable investing more than doubled from $13 trillion in 2012 to $30 trillion in 2018. Global sustainable funds recorded inflows of $45.6 billion in the first quarter of 2020 alone.
With 22 out of the world’s thirty most polluted cities in India, our ESG focus must be sharp. Companies that take good care of the environment and its people, while being in the business of business, must be rewarded.
Investment has the power to transform corporate behaviour. Retail investors should exercise that power well.
Investing in high-ESG companies will bode well for planet, people and profits.
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