What is ESG Investing and why it is important for your Investment?

Introduction:

Following the global trend, India has now started evaluating companies on a special non-financial parameter in addition to the regular financial parameters. This special parameter is ESG. You can make an environmentally and socially responsible investment, if you understand the concept of ESG Investing and its underlying importance.

So, what is ESG Investing?

ESG stands for,

E – Environmental Empathy

S – Social Responsibility

G – Corporate Governance

As a prospective investor, ESG is a parameter based on which you evaluate how a particular company fares. To consider an investment using the ESG parameter, you have to weigh its advantages & disadvantages from the standpoint of the environment, society and corporate governance. In ESG Investing, your objective is to invest in financially well-performing companies that are also beneficial for society. The companies in your consideration set here, besides churning out profits for themselves, should also positively contribute to community as a whole. Their negative contributions should also be evaluated in ESG investing.

Environmental Empathy:

The environment that we live in is at its polluted best today. The green cover of our earth is fast depleting. Our oceans, seas and rivers are increasingly being polluted with toxic wastes, damaging the ecological balance of our water bodies. With the glaciers melting and the temperatures rising, Global Warming has become an alarming reality. Air pollution is at its peak too.

India is now taking regulatory measures to ensure that companies follow the best practices for environment preservation and energy conservation. These environmental-friendly steps taken by any company would thereby reflect its high focus for growth and sustainability.

Social Responsibility:

Businesses have a tendency to be only profit-oriented. This objective leads to a lot of companies engaging in unethical practices to run their business. In order to run business with ease, companies and corporates utilise local resources like manpower, raw material, water etc from areas around its operation. And in the bid to extract maximum productivity and profits, these resources at times can be used unfairly and irresponsibly.

Indian Government introduced the Companies Act in 2013 to put an end to this wrongdoing. As per this act, companies above a definite size must compulsorily extend 2% of their profits towards being socially responsible in the society they operate. Protection of the environment, provision of quality education for underprivileged children, and women employment are some of the initiatives that have come in place since the prevalence of the Companies Act.

Corporate Governance:

As an investor it is wise to invest in companies that follow corporate governance. This is because, the transparency in conduct and integrity of companies plays a major role in the profit generating capacity of the company. Companies that are adhering to market regulations and compliances have more prospects for steady and sustainable growth.

Why is ESG Investing better for your investment?

Companies that fare well on the ESG parameter are ethical companies with good conduct that are beneficial for the environment and society. In other words, they are sustainable companies. As the world continues to grow more conscious in conduct, it is just a matter of time before ESG centric companies find the most customers, hold the best brand image and enjoy the most brand loyalty. All of this will essentially translate into higher profits for these ESG centric companies. Hence for relatively sustainable and profitable investment, ESG Investing will be your way out.

How can you invest in ESG centric companies?

It is difficult for you to individually keep a tab on the ESG evaluation of all the companies you want to invest in. Assessing ESG through a thorough study of various company reports, documents, annexures and declarations for your investments can be a taxing affair. A more accessible and efficient way to practise ESG Investing is through Mutual Funds. These ESG Mutual Funds include only those ethical companies in their investment portfolio which comply with all the ESG terms and weigh well on each of those parameters without harming society and the environment. ICICI Direct offers ESG Mutual Funds for your investment.

Additional Read: Investing in mutual funds? Here's all you need to know

Conclusion:

Investing based on ESG parameter may be a relatively new concept in India; however, it is slowly becoming an established norm worldwide. In the future, it is safe to assume that our environmentally and socially conscious growing investor pool will popularise ESG Investing in India.

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