Introduction
A change is sweeping across the world of finance, as investors increasingly look not only at profits but also at the impact investments have on the world. This marks a new era of responsible investing with ESG: environment, social, and governance investments in companies that are just and ethical while being financially sound. This article elaborates on the roots of ESG investing, who invented it, its global impact, and how India is embracing this change in paradigm.
What is ESG Investing?
ESG investing encompasses three key criteria in making investment decisions:
Environment:
This refers to the impact of a company on the planet, including carbon footprint, usage of renewable energy sources, waste management, and resource conservation.
Social:
The second component of the ESG triumvirate looks at company relationships with its employees, suppliers, customers, and communities.
Governance:
This examines the management of a company, directors’ compensation, auditing, internal control, and the rights of equity shareholders. It deals with transparency, accountability, and good governance.
Architects of ESG Investing
ESG investing grew out of the more general socially responsible investing, which has roots back in the 1960s and 1970s. The contemporary framework of ESG started taking shape in the early 2000s, catalyzed by initiatives of the United Nations. Back in 2006, the UN launched what is called the Principles of Responsible Investment, which called on investors to consider ESG criteria in their decisions.
Former UN Secretary-General Kofi Annan is the real architect of ESG investing, propagating these very principles. Annan’s efforts for sustainable development and ethical investment became the steering column on which the ESG criteria used by investors today were founded.
The Impact of ESG Investing Globally
Over the past decade, ESG investing grew at an exponential rate. According to the Global Sustainable Investment Alliance, global sustainable investment reached USD 35.3 trillion in 2020, up 15 percent from 2018. The reason for this surge can be attributed to growing awareness of climate change, social inequalities, and the compelling need for robust corporate governance.
Example 1: BlackRock’s Commitment to ESG
BlackRock has been one of the largest cheerleaders for ESG investing, and it is the world’s largest asset manager. In 2020, BlackRock CEO Larry Fink made a statement that the firm would focus on sustainability in its investment strategy and hammer home the mantra that “climate risk is investment risk.” As such, BlackRock has been trying to push ESG into its portfolio, forcing other asset managers and companies to act.
Example 2: EU’s Green Deal
Another big factor behind ESG investing has been the European Union, thanks to the ambitious European Green Deal. This scheme is targeted at making Europe the first climate-neutral continent in the world by 2050, which essentially means huge investments in renewable energy, agriculture, and green infrastructure.
ESG Investing in India
ESG investing is gaining gradual acceptance across India’s diversified dynamic economy. SEBI has mandated that BRSR be provided for the top 1,000 listed companies from FY 2022-23, which seeks to enhance transparency and therefore accountability, pushing companies toward sustainability practices.
Example 1: Sustainability Initiatives at Tata Group
The Tata Group is among the largest conglomerates in India and has been at the helm of ESG initiatives. For its part, Tata Power has pledged to be carbon neutral by 2050. It has invested substantially in projects for renewable energy and plans to increase its clean energy capacity to 80% by the year 2030.
Example 2: Green Vision by Reliance Industries
Mukesh Ambani, the head of Reliance Industries, pledged to invest $10 billion in green energy over three years. This includes gigafactories for solar panels and new energy storage, batteries, and hydrogen fuel cells establishing India as a global center for renewable energy innovation.
The Financial Process of ESG Investing
ESG investing has numerous financial mechanisms and terminologies:
Screening: Positive or negative screening is applied by investors to include or exclude companies based on ESG criteria. While positive screening includes those firms excellent in matters of ESG practices, negative screening excludes companies engaging in harmful activities like fossil fuels or tobacco.
Engagement: The investors engage with companies with an aim of influencing their ESG practices. These may include shareholder proposals, dialogue with management, and voting on ESG-related issues.
Integration: ESG factors are integrated into traditional financial analysis and portfolio construction. The approach considers financial performance together with ESG for identifying investment opportunities and risks.
Thematic investing: This approach focuses on specific themes within ESG—clean energy, water conservation, or social equality—and funnels capital into sectors that align with the theme in question.
Conclusion
ESG investing is much more than a fad. It is a movement to a more sustainable and more equitable world. From its very roots, through the visionaries led by Kofi Annan, to the present global impact and reach in India, ESG investing is undoubtedly the future of finance. One shall help ensure a better world with long-term financial returns by promoting green, social, and good governance factors.
