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ESG – environment, social and governance – is a popular acronym in the world of investing today as analysts believe companies that score well on these parameters will be sustainable in their profits too.

On the occasion of World Environment Day, Money9 spoke to Chirag Mehta, Senior Fund Manager – Alternative Investments at Quantum Mutual Funds to tell investors that ESG offers better returns than benchmark indices.

Edited excerpts:

Q: How can an individual benefit from investing in companies with high ESG score?

Chirag: ESG covers environmental, social and governance aspects of a business, not just profits. Investors have always focused on returns. Now the question is, are returns sustainable? ESG score indicates the impact of a company’s operations on the environment. High ESG score shows that the company is less exposed to significant risks that may arise from environmental issues. So investing in businesses that are environmentally responsible and contributing to natural resources by operating in a sustainable manner can give investors consistent and steady returns because they will be less risky in the future.

Q: Will caring for the environment result in reduced investor profits?

Chirag: No, that’s a myth. Take the example of the cement sector in India. Globally, cement industries contribute 6% to 8% to the carbon footprint. In India, cement companies are far better in terms of their emissions, waste disposals and water usage. They are far ahead of their global peers on environmental practices. They are doing a far better job and also giving good returns to investors. So, it is a myth. To become ESG compliant, a company may need to make some investments now, but there will be benefits down the line. When regulations unfold, sooner or later companies will need to comply. High ESG ranking companies today will be better prepared for that eventuality.

Q: Should ESG scores become a mandatory disclosure for all listed companies?

Chirag: Companies don’t disclose ESG scores yet because it is a lot of data like water usage, emission levels, gender mix etc. SEBI has mandated corporate social responsibility, but there are ranking agencies that analyse ESG parameters. Some of those are also on future plans of a company on the ESG front. But that should not be taken on face value. Like beauty lies in the eyes of the beholder, two ESG analysts will look at ESG parameters differently. Especially on the social and governance part, arriving at a consensus is difficult. For environment, by and large, there is agreement, but looking at the future, at action plans, and intent – the analysis will differ from person to person.

Q: What benchmark index should investors compare their ESG investments with?

Chirag: From an investor’s perspective, you should look at ESG versus traditional indices like Sensex, Nifty 50, BSE 200 etc. See how ESG index that takes all high-ranking ESG companies that care for the planet into account is performing versus indices that rely only on market cap-based raking. The risk factor will be significantly lower for ESG. When markets fell sharply last year, the impact on ESG companies was significantly lower. When markets rebound, ESG gave better returns to investors than market indices.

Q: How do you see ESG Mutual Funds perform over Nifty50 in the next ten years?

Chirag: If you are looking at a very long-term timeframe like 10 years, our belief is, ESG should do well as these companies have a very high sustainability factor and when seen over the entire market cycle of 10 years, it should easily outperform the Nifty 50. The last three years including Covid-19 have given us proof that from an investor’s perspective, these companies have given better returns while they have also been better for the planet.