What is ESG and why is it important?

ESG in simple terms is a proactive way for businesses to measure and manage risk. Investors use Environmental, Social and Governance factors to evaluate companies on how far advanced they are with sustainability. These are non-financial factors that are part of their analysis process and helps in identifying material risks and growth opportunities.

Once enough data is acquired on these three metrics, they can be integrated into the investment process and decision-making. It also helps investors to avoid companies that might pose a greater financial risk.

ESG reporting assures investors, customers, and other stakeholders that they are receiving complete transparency regarding the company's operations and future objectives. From an investee’s perspective, ESG ?has emerged as a tool for the?management?to deliver great returns to all stakeholders of a business.?

Many tenets of the idea have been written into laws.?Stock exchanges?across the world seek to report on ESG principles and at the same time ESG compliance opens doors for global funding for businesses across the world.

As per Nigel Green, the chief executive and founder of deVere Group, which has $12bn under investment, calls ESG – The Investment Megatrend.

Why is ESG getting attention?

Sustainability-focused investing, now pegged as environmental, social and governance (ESG) led investing has picked up pace Globally. More than $ 30 trillion have been invested through sustainable investing in the last few years. That is lot of money.?As we speak, 25% of investment in US & 50% of investment across Europe is going into ESG Focused Funds. The Covid-19 pandemic has accelerated investments related to ESG. Companies with a commitment to ESG are attracting unprecedented amounts of cash and attention.

Millennials who are predominantly controlling the market demand, most of whom are curious about sustainable investing and are expecting companies to focus there too.

Also, ESG focused companies have consistently outperformed the market average. They have got less impacted by the worst possible global pandemic and their recovery too has been way better than the rest!

In a recent study by Harvard Business Review (HBR), 70?executives?were interviewed across 43 global institutional?investment firms?and it was found that ESG was almost universally on top of the mind for all these executives.

The top motivations for ESG investing are long term return, positive brand & reputation, and risk aversion.

ESG in India

ESG is no longer a first world phenomenon. It’s here in India and it’s becoming big. Domestic ESG funds had average assets under management (AUM) of ?9,800 crore in FY21, with seven of 10 such funds launching after June 2020. Over the past year, assets invested in Indian ESG funds have grown to Rs 12,000 crore at the end of June 2021. ESG bonds have already made a mark in India with Indian companies raising close to $5 billion in calendar year 2021 so far.

Sustainability,?corporate social responsibility?and governance have moved from the side-lines to core of the boardroom agenda. They are now being seen as integral elements to the organization strategy and are enabling better profitability and higher operating margins.

Securities and Exchange Board of India’s (SEBI) new Business Responsibility and Sustainability Report (BRSR) standards will require wider disclosures across multiple parameters under E, S & G. This will be applicable to the top 1,000 listed companies based on market capitalisation and will become mandatory from financial year FY23. This will facilitate the maturity of ESG in India, as the new standards will help investors compare the ESG performance across companies and sectors and make more informed investment decisions.

Given that sustainability reporting is voluntary in India, yet 41 of the 50 Nifty companies provide detailed sustainability disclosures. This is an indicator of ESG’s growing clout in India. But, what’s the incentive?

The answer lies in the long-term benefits and relationship between ESG maturity and company's financial performance. Everyone is trying to get a share of the pie. It’s a ESG GOLD Rush!

In my next blog I will attempt at exploring the relationship between ESG & Brand. I will also try to answer the question on how to create an ESG centric brand?