Popularity and tangible results drive the trend
As investments in ESG funds pick up pace, the environmental factor dominates in India, say investment consultants. ESG stands for ‘environmental, social and governance’ investments. These are essentially non-financial factors that are used to measure investment instruments to enable a socially responsible form of investing.
While investing in ESG funds is in its nascent stage in India, they have been on the rise, surging to 76 percent in 2020-21, according to media reports.
However, a trend has been observed, wherein, investments in the ‘environment’ factor have dominated the ‘social’ and ‘governance’ factors globally.
Nitya Surya, an ESG investment consultant from Mumbai, corroborated a similar trend in India as well. Explaining to The Observer, he said: “There are multiple reasons for such a trend to occur in the country. The main one is that they perform well in the market, with the returns on such investments outperforming by approximately 25 percent. When one invests in an environmentally conscious company, it is often understood that they have practices that are compatible socially as well.”
“Climate change affects the economy, which in turn has linkages with the income of the people, determining their social status and further — the society’s practices. So it is all interlinked,” he added.
Surya also credited the recent surge in ESG investments to the Covid-19 pandemic.
“In the pandemic, where almost everyone was badly hit, there were some companies that showed resilience, especially since they were involved in ESG-compliant practices. And since investment is about looking at the future and making decisions, their popularity has surged. People can now see the effects of climate change in companies,” he added.
Vaibhav Jain, Head of Advisory and Business Strategy at Tavaga Advisory Services, said the trend has to do with the fact that environmental effects have ramifications for companies. He said: “For any business, an environmental clearance is a must. It is a tangible factor for the industry, whereas the social and governance factors are intangible. And in a time when everyone is moving towards being carbon neutral, the popularity is understandable.”
“No balance sheet reflects how diverse their workforce is or how well delegated the responsibilities are in the company. So fund managers find it difficult to understand the social and governance parameters. So environmental factors dominate investment decisions,” he added.
Animesh L, an investor from Mumbai, said the long term optimism towards ESG funds is what led him to invest in them. He said: “A company being sustainable goes in the favour of both, their practices and in long term wealth creation. While I was somewhat motivated due to the fad element surrounding ESG, it was mostly due to the factor that the fund managers of ESG investments are bullish about them in the long term.”
Dr. Moinak Maiti, an associate professor of finance in National Research University in Russia, said while the trend is definitely visible in India, it is changing. “Yes, while the ‘E’ factor does dominate in India, as it does elsewhere, the current pandemic has highlighted the importance of ‘S’ and ‘G’ factors as well. So, in the coming decades, these will be given importance as well.”