SUSTAINABLE INVESTING USING ESG

OVERVIEW

Lately Procter & Gamble received adverse media attention for using micro plastic beads in their toothpaste. This clearly shows why considering ESG factors has now become a thoughtful investing practice.

ESG is an acronym for Environmental, Social and Governance. It is a parameter popularly used to analyse and understand how companies have evolved from socially responsible investing to sustainable business practices. ESG analysis helps in evaluating the viability and long-term sustainability of a business.

This practice was started by the older generations of investors and is being increasingly adopted by the “millennial generation.” 86% of millennial investors are twice as likely to invest in companies that target social or environmental outcomes. How there is not much clarity on what future this beholds!

Will Gen Z take ESG investing to the next level?
SIGNIFICANCE

ESG approach provides a framework for critical reasoning and challenges the generic assumption that a company will continue operating in the long term, while in reality many companies are unable to adapt to a changing marketplace. Forward looking firms are likely to make long-term investments that enable them to adapt and think beyond the short term, which helps them to manage and mitigate risks.

ESG also includes negative screening. Through negative screening, companies that do not adhere to ESG related practices are excluded from the portfolios of investors who wish to align their investments with their values

Companies who incorporate strong ESG practices tend to score higher in terms of reputation and goodwill which enhances their brand value and in turn contributes towards a steady and more sustainable performance. It provides the real picture of a company’s long-term viability and governance. On the other hand, companies who do not adopt any form of ESG practices end up with a low ESG score and expose their investors and other stakeholders to higher risks over the long term.

ESG IN THE CURRENT ENVIRONMENT

In general, we are a more socially conscious generation which is why on the global front the concept of ESG has seen dramatic growth in importance over the last decade. Several companies are going out of their way and doing beyond what is expected of them to help the society at large:

· Nestle provided its sales force a Covid-19 insurance cover.

· HUL is distributing its health and hygiene products for supporting hospitals.

· Avenue Supermart has introduced bulk delivery services directly to large housing complexes.

· Banks are providing financial relief through the RBI EMI moratorium to those whose livelihoods have been severely affected.

· Maruti Suzuki is assisting in the production of ventilators and other protective equipment.

· India Hotels & Mahindra Holidays are offering free stays for medical staff and converting their facilities into makeshift quarantine centres

SUSTAINABLE RETURNS

The covid-19 pandemic has sent shockwaves through the global economy and will leave major changes in the way most of us live on a day-to-day basis. In the ESG-themed investing space there has been an explosion of different models and solutions in order to build back the better.

Taking the opportunity to deal with the pandemic situation through a green stimulus by committing to bold and effective measures to promote the principles of a green economy and sustainable investing can help build momentum in such markets.

Sustainable investors do not wish to park their funds with companies that are likely to come under the grill for not complying with regulations. Due to this emerging investing practice, companies that adhere to strong ESG factors tend to outperform their peers. As young people, we are long-term investors which is why ESG investing is fundamentally important for both our finances and for our society to remain sustainable.