What is ESG investing and everything you need to know about it
The values of investing have undergone a profound change in the last few years. With environmental concerns taking centre-stage in international matters, to a rise in demand for social justice, the ideologies have also percolated into investment avenues. ESG or environment, social and governance investing has grown multi-fold.
Research suggests that ESG investing will balloon to $50 trillion globally from a current $35 trillion market. ESG investing emphasizes choosing to be a more environmentally and socially-conscious investor at its core. Let’s delve into this some more.
1. What is ESG investing?
Environment, social and governance investing is a strategy that aims to invest in companies with a strong ethical factor while simultaneously generating good returns for investors. While there is no set benchmark as to what constitutes ESG investment, companies geared towards environment conservation or improvement, work towards social justice causes, such as poverty alleviation, or have a robust governance factor are considered promising targets for ESG investing.
Here are some aspects that you can look at to understand whether a company is an ESG candidate:
- Environment – Carbon emissions, pollution, deforestation, green initiatives, water usage, waste management
- Social – Human rights, fair labour practices, company’s sexual harassment policies, data security
- Governance – Board diversity, executive pay, lawsuits, corruption, political contributions
2. Why is ESG investing important?
Who cares Wins. This is the title of the world’s first ESG study published in 2005 by then UN-Secretary General Kofi Annan. ESG investing is important because it considers more than just the company and the individual investor. It pays attention to the world we live in, how we treat fellow humans and how ethical the world of capitalism really is.
Given the world we live in, with the pandemic sweeping across the globe and stories of injustice abounding, you cannot underplay the importance of ethical practices. When investors support ethical companies and pump money into them, the domino effect on the world will speak for itself. At the same time, a company that is socially aware, keeps its employees and customers happy, is also likely to perform better. Through ESG investing, the world can be made a better place, and you can contribute to it.
3. Pros of ESG investing
Making investments in companies sensitive to environmental, social, and governance factors has numerous benefits.
- ESG investing is a holistic way of investing where you can be assured that the companies you are investing in are ethical
- ESG helps companies achieve better top-line growth. This means returns are attractive for you
- Companies with a strong ESG factor are less likely to get caught up in government and regulatory scrutiny
- A growing significance of ESG means you will have a broader range of companies to choose from
- As more and more investors choose ESG investing, it can force unethical companies to become more ethical in their practices
4. Cons of ESG investing
Nothing is black or white. There are shades of grey even with the best intentions. That means that while ESG investing is a noble consideration, it has its own pitfalls.
- There is no set definition for ESG. This means that ESG investing can mean different things to different people. You will need to do thorough research before investing in an ESG fund
- It may require professional advice. You may need to consult an expert to understand whether a company actually meets ESG criteria
- There is a fear among the investment community that ESG investing has prompted an increase in greenwashing. This is a marketing strategy that companies portray to be more environment friendly than they actually are
- There is no guarantee that your ESG investment will outperform an investment in companies that are not ethical. For instance, oil companies may still beat your ESG investment during a positive market condition
5. Options for ESG investing in India
One of the best ways to make ESG investments in India is to invest in an ESG fund. An ESG fund is a professionally managed mutual fund that invests in companies with strong ESG factors. It reduces the need for you to do your own research. Alternatively, you could hire an investment advisor to make ESG investments on your behalf. However, you need to be clear with your intentions since there is no definition of ESG. You could also do your own research and invest in shares and bonds of companies with strong ESG factors.
ESG investing is picking up steam worldwide for its humane investment methodology. However, that doesn’t mean it has no pitfalls. You need to be careful while choosing funds or companies for your ESG strategy. There may be companies that are not 100% honest about their practices. Despite its pitfalls, ESG investing can be lucrative and ethical.
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