ESG: Environmental, Social and Governance

What is ESG?


ESG—environmental, social and governance—describes areas that characterize a sustainable, responsible or ethical investment.


The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate behaviour and to determine the future financial performance of companies.” It is used by investors to evaluate corporations and determine the future financial performance of companies. It adds that ESG “are a subset of non-financial performance indicators which include sustainable, ethical and corporate governance issues such as managing a company’s carbon footprint and ensuring there are systems in place to ensure accountability.”


Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks.


No single company may pass every test in every category, of course, so investors need to decide what's most important to them. On a practical level, investment firms that follow ESG criteria must also set priorities. For example, Boston-based Trillium Asset Management, with $2.8 billion under management as of March 2020, uses a selection of ESG factors to help identify companies positioned for strong long-term performance.2 Determined in part by analysts who identify issues facing different sectors and industries, Trillium's ESG criteria include avoiding companies with known exposure to coal mining and those a certain percentage of their revenues from nuclear power or weapons. It also avoids investing in companies with major recent or ongoing controversies related to workplace discrimination, corporate governance, and animal welfare, among other issues.


ESG: Advantages and Disadvantages


In years past, socially responsible investments had a reputation for requiring a trade-off on the investor's part. Because they limited the universe of companies that were eligible for investment, they also limited the investor's potential profit. "Bad" companies sometimes performed very well, at least in terms of their stock price.


More recently, however, some investors have come to believe that environmental, social, and governance criteria have a practical purpose beyond any ethical concerns. By following ESG criteria they may be able to avoid companies whose practices could signal a risk factor—as evidenced by BP's 2010 oil spill and Volkswagen's emissions scandal, both of which rocked the companies' stock prices and resulted in billions of dollars in associated losses.


As ESG-minded business practices gain more traction, investment firms are increasingly tracking their performance. Financial services companies such as JPMorgan Chase, Wells Fargo, and Goldman Sachs have published annual reports that extensively review their ESG approaches and the bottom-line results.



ESG COMPANIES

The ESG (environmental, social and governance) criteria helps access how a company performs as a steward of nature, how it manages its relationships with stakeholders and how transparent is it with regard to its disclosures and management practices while emphasizing a high degree of moral and ethical leadership.


Few Top Performing ESG Companies:


Nvidia

NVIDIA Corporation is known for designing graphic processing units for the gaming market as well as for chips for mobile computing and automotive markets. NVIDIA is a highly-rated ESG company because it has a stringent policy regarding conflict minerals. The company has specific due diligence procedures to ensure that it never uses conflict minerals in its products. The company is also big on the governance aspect as it trains nearly 100% of its customer/supplier/partner-facing workforce for anti-corruption and anti-bribery.


Microsoft

Microsoft Corporation develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services. Microsoft has taken the lead in its commitment towards carbon mitigation by becoming the first company among its peers to target “carbon negative” status by 2030. It has created a $1 billion fund to reduce emissions and start clearing carbon.


UltraTech

UltraTech Cement Limited is a cement company in the 'Construction Material' Industry sector. UltraTech has integrated low carbon strategy into its business roadmap. Initiatives like cooler upgradation, calciner modification, voltage variable frequency drive installation and burner modification across their manufacturing plants have drastically improved the company's energy productivity.


Salesforce

Salesforce provides customer relationship management service and also provides a complementary suite of enterprise applications focused on customer service, marketing automation, analytics, and application development. It has committed 1 million employee hours to the UN’s Sustainable Development Goals. Salesforce has net-zero emissions for its operations globally and delivers customers a carbon neutral cloud.


ESG Mutual Funds


ESG mutual funds is a collective pool of companies which follow the Environmental, Social and Government regulations. Investment in ESG is also called sustainable investing which has come to light due to growing concern regarding ‘Global Warming’ and a healthy sustainable future. It is said that an ESG company will have a higher chance of succeeding in the upcoming market than the simple ones.


Investment in ESG was driven by institutional investor but now it’s also gaining interest of retail investors which is evidently visible by the increase of ESG mutual funds. Some examples of which are

1) Aditya Birla Sun Life ESG Fund

2) Axis ESG Fund

3) ICICI Prudential ESG Fund

4) Kotak ESG Opportunities ESG Fund

5) Mirae Asset ESG Sector Leaders ETF

6) Quantum India ESG Equity Fund

7) Quant ESG Equity Fund

8) SBI Magnum Equity ESG Fund


Investment in ESG Funds extends further than the financials of company which shows a paradigm shift in the mentality of investors from defining value in terms of rupees to social/environmental value. Although investment in ESG is a bold move but investors should be careful about Greenwashing i.e., when a company claims to be ESG but in reality, it isn’t thus it is important for investors to understand the process of ESG labels and the factors that determine whether a company is ESG or not.



What is ESG Investing?

ESG (Environmental, Social and Governance) investing refers to a class of investing that is also known as “sustainable investing.” This is an umbrella term for investments that seek positive returns and long-term impact on society, environment and the performance of the business. There are several different categories of sustainable investing. They include impact investing, socially responsible investing (SRI), ESG and values-based investing. Another school of thought puts ESG under the umbrella term of SRI. Under SRI are ethical investing, ESG investing and impact investing.


The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.” It is used by investors to evaluate corporations and determine the future financial performance of companies. It adds that ESG “are a subset of non-financial performance indicators which include sustainable, ethical and corporate governance issues such as managing a company’s carbon footprint and ensuring there are systems in place to ensure accountability.” They are factors in investment considerations, used in risk assessment strategies incorporated into both investment decisions and risk management processes.


According to Environmental, Social and Governance Issues in Investing: A Guide for Investment Professionals, “There is…a lingering misperception that the body of empirical evidence shows that ESG considerations adversely affect financial performance.” It adds that, “For investment professionals, a key idea in the discussion of ESG issues is that systematically considering ESG issues will likely lead to more complete investment analyses and better-informed investment decisions.”

Factors of ESG Investing


ESG investing looks at “extra-financial” variables or factors. Responsible investors evaluate companies using ESG criteria as a framework to screen investments or to assess risks in investment decision-making. Environmental factors determine a company’s stewardship of environment and focus on waste and pollution, resource depletion, greenhouse gas emissions, deforestation, and climate change. Social factors look at how a company treats people and focuses on employee relations and diversity, working conditions, local communities, health and safety, and conflict. Governance factors take a look at corporate policies and how a company is governed. They focus on tax strategy, executive remuneration, donations and political lobbying, corruption and bribery, and board diversity and structure.


ESG investing can take various forms. The S&P Dow Jones Index splits sustainability into two categories: ESG and green or low carbon. The ESG framework of investing tends to capture more factors, while green is more focused. Environmental factors include waste management, water management, environmental resource use, environmental disclosure, environmental impact, and reduction of pollution and emissions. Social factors include stakeholder analysis, workplace mentality, human rights, diversity community relationships, corporate citizenship, and philanthropy. Governance factors include board structure, management compensation, stakeholder impact, stakeholder rights and the relationship between management and stakeholders.


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