Introduction to ESG (Environmental, Social and Corporate Governance)

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The COVID pandemic has drawn attention to the financial performance of the ESG stocks. And companies with good ESG in the pandemic times had low vitality as compared to the non-ESG categories. Let’s now know more about ESG investing and reporting.

ESG is a way to sustainable investment.

The abbreviation ESG is Environmental, Social, and Corporate Governance. It is a criterion that measures how the companies or investments perform under these three categories. Environmental factors focus on the conservation of natural resources, pollution, waste management, and other environmental concerns. Social factors examine how people are treated within and outside the company, and governance factors such as political corruption, lobbying, etc., consider how well the company is functioning. Investors’ consideration in incorporating these three categories while selecting an investment and not leading all by the potential profitability or risk makes a “socially responsible investor”.

What is ESG Investing all about?

ESG Investing is sustainable investing that evaluates the financial returns considering the environmental, social, and governance factors and their overall impact. The ESG scores of investment measure the sustainability of investments in three areas of ESG. The concept of ESG investing is driven by the ideology that large investors can pressure the corporate world to behave in an environmentally friendly, socially responsible, and governance perspective.

The E factor or environmental factor:

The E factor addresses the impact of the company on nature through:

Carbon and greenhouse gas emissions.
Climate change policies.
Water usage and conservation.
Green energy initiatives.
Waste disposal and management.
Recycling practices etc.

The S factor or Social factor:

The social component covers matters affecting employees, consumers, customers, suppliers, and the community as a whole. Below are a few examples:

Employment safety measures.
Employee compensation and diversity.
Prevention of Sexual Harassments.
Diversity in promotion, pay, and hiring.
Fair labor practices.
Customer satisfaction.

The G factor or Governance Factor:

The governance factor is related to the management of the company by the top executives towards the interest of stakeholders of the company. It covers topics such as:

Ethical business practices.
Executives’ pay, bonus, and compensation.
Shareholder’s power to nominate board members.
Political Contribution.
The voting process of the board directors.
Diversity of the board and management team.

ESG Reporting and its importance

ESG reporting is the disclosure of all relevant data covering the company’s operation in three areas- environmental, social, and governance. It provided a quick view of the performance of the company in these areas and its impacts on the investors. The disclosure summarizes the qualitative and quantitative aspects of a company’s performance aligned with ESG factors. ESG reporting helps the investors to avoid companies posing high financial risk due to environmental performance or due to social or governance practices. Though ESG reporting is not compulsory, there is an increase in global regulation related to ESG reporting. Companies with good ESG scores have demonstrated higher returns on investment, low risks, and sustainability during crises. Proactive and future-oriented business understands the importance of ESG factors in their business strategy and purpose. These companies disclose the ESG data in their annual reports. One such example is the S&P 500 index whose 90% of companies published the ESG reports as of July 2020.

ESG in India:

The Nifty 100 ESG index is formulated to represent the performance of the companies listed in the Nifty 100 index based on the ESG score. There are instances where this index outperformed its parent index Nifty 100 across different time frames. The mutual fund industry in India is always capitalizing and has rolled a new fund list for investors on the ESG performance. The top three ESG funds in India are SBI Magnum Equity ESG, Axis ESG, and Quantum India ESG Equity.