Many investment pundits are dismissing ESG (short for investing in shares of companies that meet our environment, social and governance criteria) as a new concept. It is rather surprising that they fail to understand that ESG investing is nothing more than a measure of sustainability. Our question to them is “since when did investing in sustainable good companies become a new thing?”
Rather, such investments are intuitively appealing. All the big renowned investors have made fortunes by banking on sustainability of companies. Let us make it clear to all those who haven’t understood what ESG is all about. ESG is a structured and better way of measuring the sustainability of companies by identifying risks hidden beneath a company’s business activities and it is indeed something that does have a material impact on the firm’s valuation.
Think of it, the biggest challenge for most companies today is to serve their new age consumers that demand smarter, cleaner and healthier products and services. The world around us is changing and gone are the days when corporations used to believe that pollution was free, labor was just a cost factor and scale and scope was the dominant strategy. For investors to determine which companies are best equipped to handle, and even potentially help resolve, any of these global challenges, it has become essential to have an effective way to evaluate their ESG practices.
ESG encourages a broader view and allow investors to look beyond their traditional remit. ESG information about corporations is vital to understand corporate purpose, strategy and management quality of companies. ESG factors cover a wide spectrum of issues that traditionally are not part of financial analysis, yet may have financial relevance. This might include how corporations respond to climate change, how good they are with water management, how effective their health and safety policies are in the protection against accidents, how they manage their supply chains, how they treat their workers and whether they have a corporate culture that builds trust and fosters innovation.
There is strong research evidence of ESG investing delivering better returns since companies with strong sustainability scores demonstrate better operational performance and are less risky. Such companies are typically less exposed to tail risks such as environmental accidents or punishment from regulators, and excellent ESG standards can function as a guide to a company’s overall quality of management and long-term sustainability. It also contributes to minimise risks as ESG failures can be costly to investors which are well documented in recent cases in industries such as oil exploration, automobile or finance. Companies with robust sustainability practices demonstrate better operational performance, and the beneficial impact of these practices was found to be stable over time.
That is why big global investors are ensuring that their investments move to ESG. Already, more than 1900 big renowned institutional investors like sovereign wealth funds, pension funds etc have signed up for ESG principles and increasingly moving their investments to reflect ESG sustainability. Today, more than $22 trillion dollars have already been branded ESG. Do you, as investors, still believe that this is just a new concept or a better way of investing?
To all those who dismiss ESG as a new concept will do well to remember that Investing in good sustainable companies is a time-tested way of wealth creation over the long term.
(Chirag Mehta is senior fund manager – alternative investments at Quantum Mutual Fund. The new fund offer of Quantum India Equity ESG Fund is open for subscription until July 5).