Understanding ESG Investing and ESG Stocks  

The total value of assets under management (AUM) in ESG funds in India has reached Rs 10,427 crore as of March 2023. If you find this number and ESG investing intriguing, this article will provide insights into the meaning and criteria of ESG, the significance of ESG stocks, the advantages and challenges of ESG-based investing, and how to assess corporate ESG performance.  

What Is ESG Equity Investing?   

ESG equity investing is an investment approach that takes into account a company’s environmental, social, and governance factors in addition to financial returns.  

Some common ESG parameters are listed in the table below: 

What Are ESG Stocks?   

ESG stocks, ESG Equities are shares of companies that prioritize environmental, social, and governance practices. Examples in ESG Equity Investing in India include Havells India, Tata Power, Infosys, Godrej Consumer, and Adani Enterprises. 

Why Is ESG Important?  

Companies and their actions have a significant impact on the environment and society. Therefore, ESG has become a long-term concern for businesses. With its growing importance, ESG has emerged as a crucial factor for companies’ financial growth.  

A company’s ESG performance indicates its longevity. The fact that investors consider ESG performance a crucial factor in their investment decisions highlights the importance of ESG.  

Advantages Of ESG Equity Investing  

1. Contributing to a sustainable world: ESG equity investing aims to encourage companies to maintain good governance practices and focus on addressing the world’s environmental and social issues. By investing in ESG stocks, investors can contribute their savings to promoting global sustainability while earning returns.  

2. Reduced risk: Companies that adhere to environmental, social, and governance practices and act responsibly are less susceptible to reputation and regulatory risks. Consequently, they may experience lower volatility in cash flow and profitability even in unfavourable market conditions.  

3. Potential for long-term returns: ESG equities that proactively prioritize sustainability may offer positive returns over the long run compared to those that neglect these practices.  

How To Evaluate Corporate ESG Performance?   

1. Corporate reporting: The top 1000 listed companies in India, based on market capitalization, are required to prepare a Business Responsibility and Sustainability Report (BRSR) that includes detailed ESG disclosures. Other companies may voluntarily disclose their ESG performance details. Typically, the BRSR forms part of the company’s annual report, which is sent to stock exchanges and shareholders and published on the official website. Annual reports often state companies’ ESG goals and their current status. Investors can carefully review and compare the ESG performance of companies over the years from these reports.  

2. Third-party sources: Various ESG rating providers gather data on companies, analyze them, and convert them into scores or ratings. Investors can refer to these ratings to assess the ESG performance of companies. Some ESG rating providers in India include MSCI India, CRISIL, Acuite Ratings and Research, etc.  

Risks Of ESG Equity Investing   

1. Lack of standard reporting framework: The absence of a standardized method to measure and report companies’ ESG performance makes it challenging for investors to compare and select the right ESG stocks or funds.  

2. Lack of reliable data: Due to the lack of standardized rules for ESG reporting, companies may face difficulties in recognizing data to be published. Gathering, compiling, and updating comprehensive quantitative data related to ESG performance can also be challenging for businesses, as some data are only available from external sources.  

Final Thoughts  

ESG equities take into account environmental, social, and governance issues and aim to address them. While the preference for ESG investments in India is growing, there are still obstacles, such as traditional mindsets, limited understanding, and the absence of universally accepted standards. If implemented correctly, ESG equity investing can lead to sustainable returns. 

Disclaimer: Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully before investing.