Socially responsible investing, or ESG (Environment Social Governance) investing refers to any investment strategy which seeks to consider both financial return and social or environmental betterment in order to bring about positive changes in society. ESG investing is a broad term; it can be put into practice in a variety of ways. Moreover, ESG investing does not only refer to, for example, buying shares of social enterprises. It could range from energy investing in sustainable energy sources to people investing in a start-up that aims to help people quit smoking. Globally, the percentage of both retail and institutional investors that apply ESG principles to at least a quarter of their portfolios jumped from 48 per cent in 2017 to 75 per cent in 2019. In India, the size of ESG-linked assets stands at USD 30 billion and is expected to grow to USD 240 billion in the next 10 years. Statistics and available evidence clearly show that interest and activity in ESG investing is growing rapidly in India and around the world.
Reasons for the Growth of ESG investing
One of the chief catalysts of ESG investment growth is the change in trends and, therefore, demand in the market. People, especially in developed countries, are beginning to take notice of the myriad social and environmental issues that their country and the world faces. These issues may be climate change, water contamination, racial discrimination, abuse of labour, et cetera. There are several platforms through which people are voicing their opinions on these issues - such as social media - and younger cohorts (millennials) are assuming firm stances. When these cohorts make investments, research shows, they desire to express their views and opinions through their investments. Therefore, if one wants to take a firm stance against air pollution, he or she may invest in an energy company that actively works towards reducing its harmful gas emissions. Millennials could have access to $24 trillion in private wealth by 2020; the wealth they inherit from their predecessors also plays a part in the growth of ESG investing. As the resources available to them increases and they need not worry as much about their livelihoods, millennials may divert their attention to macro issues and express a willingness to contribute to society. This willingness is driving the growth of ESG investing via investors in the present day.
Moreover, companies are adjusting their fund allocations and investments according to these changes in thinking and behaviour. ESG investing has been boosted as a result. Companies are ensuring better work standards, reduced pollution from their plants, et cetera mainly because people are concerned about these issues. By increasing ESG investments, companies can improve their public standing and effectively gain financial rewards. For instance, Coca Cola increased its profits by 7 per cent in the year it reduced the water intensity of its production process by 20 per cent. While there are laws and regulations in certain economies that make a certain level of ESG investing compulsory - Section 135 of India's Companies Act, for example, makes it mandatory for companies of a certain turnover to spend two per cent of their average net profit for the past three years on CSR - investing in social and environmental welfare almost always leads to positive financial returns.
Some important psychological factors also play a role in the growth of ESG investing. The fear of missing out (FOMO) leads to a greater focus on ESG investment strategies; if an investor sees other investors invest in companies that have are committed to societal or environmental welfare, they may do the same. The same may apply to companies in the same industry. This tendency could either be a result of the guilt of not contributing to general welfare or the simple human disposition to maintain conformity. Moreover, when the FOMO of investors is coupled with increasing returns on ESG investments (The Nifty 100 ESG Index has delivered a return of 4.6, 9.3 and 7 per cent in the last one, three and five years) the tendency becomes stronger and more influential. We have already seen that ESG investments are yielding positive returns for companies too, and therefore both investors and companies are likely to benefit by integrating general welfare into their investments.
Sustainability
While all that has been said about ESG investing is positive and encouraging, the pressing question is: will ESG investing be sustainable? ESG investing is, in fact, inherently sustainable. Investors invest in companies that are involved with ESG related issues because they may suggest that the company is sustainable too. If a company has moved to renewable sources of energy, it is making a positive environmental impact while projecting itself as a company with relatively higher longevity. Moreover, in light of the current COVID-19 pandemic, ESG investing is, according to experts, sustainable; the crisis has brought increased concern towards issues like job security, corporate transparency and environmental welfare. However, the lack of a universal ESG standard and regulation poses a problem. Volkswagen had intentionally programmed its engines to activate emission controls when the engines were being checked by regulatory authorities; after the checking was done, the gas emission was under no control. This is not the only example of a case wherein regulatory authorities, and in general ESG standard monitors have been misled and companies have been fraudulent. Therefore, while ESG investing is desirable, there must be ways to ensure ESG standards are uniform, strict and long-lasting. For investors, standards such as the Morningstar Sustainability Rating for funds allows them to understand both how profitable and ESG-inclined the companies in their portfolios are. For companies, a uniform standard is yet to be developed. A standard law like the CSR law in India does promote uniformity, but it makes ESG investing a compulsion and obscures its benefits. For ESG investing to progress further, a global standard that does not limit investments but establishes strong incentives to make them - both for investors and companies - will be essential and potentially revolutionary.
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