ESG INVESTING: A CRITICAL OVERVIEW - Hans Shodh Sudha
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 ESG INVESTING: A CRITICAL OVERVIEW Ritika Seth1, Shubham Gupta2, Harshita Gupta 3 1 Assistant professor, Hansraj College, University of Delhi, ritikaseth@hrc.du.ac.in 2 Department of Commerce, Hansraj College, University of Delhi, shubhamg0612@gmail.com 3 Department of Commerce, Hansraj College, University of Delhi, harshitag1214@gmail.com ABSTRACT The aim of this paper is to study and critically evaluate ESG Investing and Sustainable Finance which is developed by the instrument called ESG Rating. The intent of this study is to understand the concept, importance, scope, components, shortcomings and future of ESG Investing in India. The Increasing adverse effects of climatic conditions and their unpredictable nature have forced the world to adapt to these changes and mitigate their aftermath by focusing on the global impact. Apart from studying this concept, the focus has been to understand the evolution of finance to implement this investing practice. To study how Environmental, Social and Governance concerns are affecting businesses and the financial market. Keywords- Investing, Finance, Environment, Social and Governance, Sustainability. INTRODUCTION Sustainable investing, these terms are Environmental, and interchangeably used with ESG Investing. (Corporate) Governance better known as With ever changing times and desperate ESG, is an intangible key evaluating factor climatic conditions, a need for such for aware proposals and investing criteria emerged investors. In recent times, Investors are and paved its growth, which has been stepping up by focusing on these non- majorly driven by responsible investors’ financial and aspiration to have an impact on the environmental concerns as a part of their society and environment along with the analysis to identify selective investments economic with growth opportunities and pin down growth is a net result of a bigger trend material the cycle which is being observed around the decisions. Sustainable Financing, Impact globe to factor in the efforts to contribute Investing, to a global cause and in turn improve socially Social responsible factors risks of associated mission-related and social with investing, benefits of investing. This October-December 2021 HANS SHODH SUDHA 69
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 environmental status. Even though ESG wanted to orient their investments with Metrics is not a standard practice during their financial reporting, there is a substantial companies to adhere to a standard of increment in the number of companies environmental and social responsibility. who choose to disclose ESG metrics either This mutual fund is active even today. in their annual financial report or in the ESG investing was on a fast-track during company’s sustainability report. 2013 and 2014 when the first studies were This Emerging concept is accepted core values and published which recommended displayed good and vastly popularised among young corporate sustainability practices along investors and with good financial results. Although the concerns. concept of ESG emerged in Europe, it has According to a survey conducted by advanced to Canada, Japan, Australia and Morgan Stanley, 95% of Millennials are the USA. Financial markets in India have interested in ESG Investing. This growth also trend is also observed in the case of investing. due sensitization regular to over investors awareness ESG the umbrella of ESG financial A paper by Jacobs, Sinhal and institutions, who are factoring in ESG Subramaniam (2010) observed the stock assessments as a key investment decision. market reaction to the announcement of The various types of corporate environmental UN Principles and entered of Responsible Investment (UN PRI) has observed an initiatives, exponential rise in the signatories to over philanthropy, 2300 signatures catered to institutional voluntary investors and the survey by Morgan friendly products, etc. Their study noted Stanley also states that 85% of individual insignificant results, except for voluntary investors are interested and consider emission reduction, for which it found Sustainable Financing while making an significantly negative returns consistent investment decision. with the paper by Fisher‐Vanden and LITERATURE REVIEW Thorburn. For philanthropy, their ESG investing emerged more than 200 years ago during the Methodist like environmental renewable emission energy, reductions, eco‐ environmental study found significantly positive returns. Movement when people protested against A study by Krüger (2015) focused companies that manufactured tobacco, on the stock market response to 2,116 weapons, etc. The first sustainable mutual corporate events which are recognised by fund was launched in the US by Pax KLD as either positive or negative along World in 1971. This fund was led by two an ESG element. His study found a United Methodist ministers, Jack Corbett considerably and Luther Tyson, who wanted to refrain negative ESG events. A paper by Harvey, investing church’s money in companies Liu, and Zhu (2016) underlines that purely that contributed to the Vietnam War. They data-focused research assumes the risk negative response to October-December 2021 HANS SHODH SUDHA 70
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 of correlation mining, which overfits a preservation of the natural world and financial model to a specific dataset to its scarce resources. This criterion observe various correlations that may not vitalises whether a company adopts exist when tested out of sample. low carbon footprint and follows eco- As per the results of 1,000 research friendly methods in its functioning. reports on ESG testing, the correlation This advocates wise and efficient use between ESG characteristics and financial of resources. Some factors include- performance was reported inconclusive. Air and Water pollution The existing literature found negative, Biodiversity Loss positive, nearly non-existent Deforestation between financial Waste management performance and ESG, however majority Carbon footprint, global and correlations of research reports concluded a positive warming such Climate Change impact different Water Scarcity underlying ESG data used and the various Natural resource conservation correlation. The ground inconclusive results lies for in methodologies applied. As per the paper 2. Social: This aspect focuses on broad by Krueger (2015), the various empirical features of social aspects, majorly studies that analysed the relationship pivoting between ESG and financial performance people and relationships. At the core of do not distinguish between causality and any correlation. Usually, correlation between people. ESG and financial variables is interpreted organisations respect and hub human as ESG being the cause and financial value fostering and growth of its employees the effect, however the transmission can and community. This criterion looks at be interchanged. a company's business relationships COMPONENTS/CRITERIONS OF ESG: with its customers, community and around business consideration organisation Socially are of its developed 3 key components of ESG are – business partners. It even observes how Environmental, Social and (corporate) a business organisation upholds social Governance aspects. Since ESG factors are good in the wider world, which is not often interrelated, there may be scenarios limited to mere scope of business where identifying and classifying an ESG activities. Other factors include- activity as only an Environmental, social Customer Satisfaction or governance practice might not be Gender equality and Diversity feasible. There are no set examples of ESG Human rights issues and the list continues since new Employee engagement and emerging issues arise constantly. 1. satisfaction component Labour laws essentially targets conservation and Community relations Environment: This October-December 2021 HANS SHODH SUDHA 71
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 Data protection and privacy and then converted into indices. This Engaging in volunteering work rating transforms the raw ESG disclosures to improve the socio-economic into a key index which creates investment conditions products and smooths the process for 3. Governance: This criterion elucidates investors. standards for running a company, it There is a huge array of rating considers how the board and management practices which ascertains data to be drive positive changes. This also features included, weighs metrics systems as per the transparency and ethical well-being of materiality and, culminates subjective the company and holds the highest data as relative and absolute scores standards of governance consistently. It internally also takes into account the executive industries. Although ESG methodologies management’s behaviour to cater to the and ratings are becoming more vigorous needs of various stakeholders- employees, along with increase in number of shareholders and customers. This is the testing of scores against performance, still base, the foundation through which a scoring company is gauged. Apart from this, other remains in a state of transition. factors include and of ESG Agencies transversely in information like back largely Bloomberg, Composition of the Board of Morningstar, Directors Sustainalytics, RobecoSAM, Apex ESG Audit committee structure Solutions and firms more focussed on Lobbying financial services such as MSCI, etc are Whistle-blowing schemes engaging in providing detailed review of Bribery and corruption data and ratings through information Political associations and provided contribution consultancies and independent surveys. Executive compensation The modus operandi adopted by these Engaging in illegal and unfair institutions are intrinsically different but practices the final ratings published are used by the ESG RATING, INDICES AND ADVISORY by Thomson the firms Reuters, and ISS, outside investors in the same way and purpose. These ratings issued helps these investors After studying and analysing the to identify companies that adopt better criterions and factors involved in ESG ESG practices and are sustainably efficient components, an investor cannot make an and imprinting a positive impact of an investment decision based on just some investment or business. Some rating factors systems are ESG performance-based while stated by a company, ESG information alone is not useful unless it is some are ESG risk-based. analysed and rated using certain methods October-December 2021 HANS SHODH SUDHA 72
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 Table No. 1: ESG criteria- major Index providers COMPONENTS Bloomberg MSCI Thomson Reuters ENVIRONMENTAL Effects from Climatic Climatic change Use of resources change Pollution and Emissions Pollution waste generation Innovation Renewable energy Environmental Depletion of Resources opportunities Waste disposal Natural resources Carbon Emissions SOCIAL Discrimination Product Liability Human Rights Political Stakeholder Community Supply Chain opposition Product Diversity Human Capital Responsibility Human Rights Social Workforce Contribution Opportunities Community Relations GOVERNANCE Executive Corporate Shareholders Compensation Behaviour CSR Strategy Takeover Defence Corporate Management Cumulative Voting Governance Staggered boards Shareholders’ rights Key Metrics and Sub- More than 120 34 186 metrics Different agencies/index providers urged for better standardised reporting have different ESG criterions for rating measures. Currently 80 exchanges have purposes. The table above mentions the issued their own reporting guidelines and factors Bloomberg, MSCI and Thomson many more will follow in coming years. Reuters take into consideration while Apex ESG solutions, which is a preparing an index rating. leading ESG analyst issues ESG metrics Since these ratings are not standardised and the process it follows to release the and regularised, many stakeholders have rating is discussed below. October-December 2021 HANS SHODH SUDHA 73
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 ESG Excellence- ESG experts at Apex 17.1 trillion in 2020. Moreover, according monitor an organisations’ presence at both to Sustainalytics the NIFTY 100 ESG Index global and local level. has outperformed its parent index NIFTY Client Scoping- At this step, a 100, with overall ESG risk rating score at clarification of need, scope of service and just 24.6 as compared to 27.5 at NIFTY products is done regarding a business of 100. the client. Various Critics and ESG analysts’ Data Collection- Data of the business and have pointed out the fact that ESG operations is collected through secure investments often lose out to financial lines and contest primary and secondary gain and profit and in turn this restricts information relating to social indicators the efficiency of financial markets and and indices businesses. The main focal point of Analysis, Rating and Benchmarking- A financial markets is to grow investors’ detailed review is carried out and set wealth and maintain a balance in the against UN economy. The sense of balance and Sustainable Development Goals, sector growth is lost when the choices are peers and relevant regulations. restricted due to ethical principles and Report Delivery- A customised report is missing prepared and tailored according to the opportunities. client’s need and is then delivered. trade-off between ethical principles and Gap Analysis- A review of the report is profit motive. Milton Friedman, a leading done and guidance and recommendations economist shares the same school of are thought and claims that ESG strategies international suggested standards, to eliminate any out on This some good return acknowledges the shortcomings. increase un-necessary expenses SHORT-COMINGS/ CHALLENGES TO dissipate shareholders’ and ESG INVESTING profits. He believes that a stock should be ESG investing sounds very optimal and futuristic and it also has definitive and investors evaluated on the company’s financial worth and profits. facts and figures to back it up, though it There are various ESG funds hasn’t been able to achieve its full which are performing and yielding return potential in the financial domain and like at par with Index funds barring certain every other aspect it has its own set of companies that can affect your portfolio’s challenges and shortcomings to overcome end result. For example, if oil stocks and achieve the goal of sustainable future. proliferate suddenly and if an ESG fund The US SIF Foundation: The doesn’t have those stocks, that fund will Forum for Sustainable and Responsible be out-performed and thus making it Investment observed a rise in assets held restrictive. by investors chosen as per ESG criteria. Another challenge ESG investing This increased from 12 trillion in 2018 to faces is that of being more expensive than October-December 2021 HANS SHODH SUDHA 74
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 normal Index funds, ESG funds are 2020. Since the introduction of Nifty 100 slightly more expensive then Index funds ESG Index in 2011, it has outperformed its due to more research and extensive parent index with a return of 10.6% as workload. ESG funds require substantial compared to 9.1% of the traditional Nifty and regular research which can eat up the 100 Index. This proves a steady growing investor’s earnings since the individual interest in ESG investing by Indian has to invest more to be in that fund. investors. Financial Firms ESG The demand and growth for ESG approaches as a premium product and funds in India is experiencing an upward charge a higher fee. Moreover, ESG curve and with pandemic hit it all went supporters had a fallout when The U.S. uphill. The covid crisis turned out to be an Department of Labor guided fiduciaries inflection point in the minds of Indian of to investors and the flow of money has implement investment strategies based on remarkably risen into ESG funds says investment performance rather than ESG Kaustubh Belapurkar, Director of Fund concerns, however, this is not the case for Research at Morningstar India. Earlier personal investments. Indian investors did not have many ESG employee Even often benefit deem programs with these fallouts and funds options but after October 2020, many still believe that more than half a dozen asset management pursuing ethical principles and following companies have introduced ESG-centric ESG concerns help a company succeed in fund plans. Major funds include Axis ESG the long run. For example, if some Equity Fund, Quantum India ESG Equity, corporate acts SBI Magnum Equity Fund (oldest ESG in fund in India). Apart from these, ICICI environmental aspects, this will likely Prudential AMC, Kotak and Aditya Birla incur liability and damage the image and have reputation of the firm. And as far as it Currently, India has two major ESG goes for rate of return it is believed that indices, S&P BSE 100 ESG Index and Nifty ESG funds will yield return at par with 100 ESG Index. challenges, deals irresponsibly in and bad is faith, careless also introduced such funds. other Index funds over a period of time. As per Morningstar, in the quarter Also, there is no concrete proof that ESG ended of December 2020 Indian Markets funds yield less returns. were flooded with a net inflow of 3,749 ESG IN INDIA AND SCOPE crores into ESG based funds and in March The success and growth of ESG investing worldwide way Since inflow of capital into ESG funds in towards Indian Markets, after being big India is experiencing a boom, it is very globally. Management likely that other companies will follow (AUM) nearly doubled itself in the last through and exhibit better Environmental, four years amounting to 40.5 trillion in Social and Governance practises. Assets paved under its 2021 it saw a net inflow of 678 crores. October-December 2021 HANS SHODH SUDHA 75
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 The reason for the success of ESG we look at ESG in other parts of the world, funds in India can be explained largely we can say that we still have a long way to due to more investors becoming socially go, but nonetheless India is moving ahead aware and conscious regarding the ESG in this avenue. With regulations becoming components. Moreover, factors such as more stringent and periodical inspection statutory regulatory requirements have of regulations moving akin, standards to played a vital role to impel companies to be ESG compliant are getting robust every be more ESG compliant. There have been day. It is now imperative for firms to many and follow these regulations and it is better to business firms were close down or be on a safer side because serious penalised these repercussions will follow if caught. ESG regulations, making it clear that severe compliant companies in India will also consequences will follow. Apart from this, observe a significant rise in market share many and due to increasing interest by consumers independent investors are extensively and non-compliant competitors struggling investing in ESG compliant companies to meet the norms and pass the bar. and sustainable business models. These Following lucrative offers have attracted many firms enhance the company’s reputation and to follow regulations and prospects of credibility by several folds and will also Foreign Direct Investment (FDI) have attract investors due to a sustainable made ESG investing even stronger in future. India. ESG FUNDS IN INDIA cases for where not foreign companies abiding to institutional As per Nifty reports, it can be standards and rules will Currently India has 10 ESG centric concluded that ESG indices are more funds productive in the post-Covid period than attributes. Some funds have an allowance the pre-Covid period. Thus, giving an for global stocks, some funds have their impression that investors are inclining own market capital and have different towards ESG indices post aftermath of sector preferences and some are passive Covid. Consequently, ESG portfolio can funds. The ESG Funds in India are SBI be accredited as Covid free portfolio. The Magnum Equity ESG Fund, Axis ESG rising concern for environment friendly Equity Fund, Quantum India ESG Equity methods have Fund, Aditya Birla Sun Life ESG Fund, proved to be the main cause for this boost ICICI Prudential ESG Fund, Invesco India of ESG funds in India. ESG FUTURE and OF Covid ESG pandemic INVESTING IN INDIA and each Equity fund Fund, has different Kotak ESG Opportunities Fund, Mirae Asset ESG Sectors Leaders FoF, Quant ESG Equity The way ESG has performed in India can be termed as prodigious but if Fund and HSBC Global Equity Climate Change Fund. October-December 2021 HANS SHODH SUDHA 76
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 Table No. 2: ESG Funds in India- performance comparison Return(%) as on SBI Magnum Axis ESG Quantum India 12th March 2021 Equity Fund ESG Equity Equity Fund Fund 3 Months 11.60 8.53 13.63 6 Months 30.52 30.02 35.97 1 Year 49.90 48.04 64.30 5 Years 14.83 - - SBI Magnum Equity Fund segments. (repositioned as SBI Magnum Equity Quantum India ESG Equity Fund is a ESG Fund) is one of the oldest existing thematic-ESG mutual fund scheme ESG Fund in India. Founded in 1987, from Quantum mutual fund. It was this was a partnership between SBI and launched in July 2019. As on 31 st AMUNDI (France), which is one of the October 2021, it invested in equity world's holdings of 45 companies with Infosys leading fund management firms. SBI Magnum Equity Fund was Ltd, launched in 1991. It has 42 equity Finance Corpn. Ltd, Wipro and Marico holdings (as on 19th March, 2021) and Ltd as its top 5 holdings. It has invested its top holdings include ICICI Bank, 94.75% funds in equity, 5.82% in debt HDFC Bank, Infosys, TCS and Tata and 0.57% in other segments. Motors. As on 31 October 2021, it has st invested 95.36% in Equity, 0.05% in Debt and 4.59% in other segments. TCS, Housing Development CONCLUSION ESG Investing has come a long way, a step taken to bring balance and Axis ESG Equity Fund is a thematic- responsibility in the corporate world ESG mutual fund scheme from Axis through the finance domain and financial mutual fund. It was launched in markets. February 2020. As on 31st October 2021, environment and social domain expedited it has equity holdings in 50 companies a fire among concerned and responsible with Finance, investors and soon started to influence Avenue supermarts, Wipro Ltd. and others. It is a great initiative to give back TCS as its top 5 holdings. It has to society and save the planet alongside invested 96.24% funds in equity and leading to a sustainable future. It is crucial 4.09% in debt and 0.33% in other for every investor, be it small or large, to Nestle India, Bajaj Growing concern for the October-December 2021 HANS SHODH SUDHA 77
HANS SHODH SUDHA, VOL. 2, ISSUE 2, (2021), pp. 69-80 ISSN: 2582-9777 contribute and be a responsible citizen of of our research paper. the planet. With big scope in ESG REFERENCES: 1. Boffo, R., and R. Patalano, “ESG Investing: Practices, Progress and Challenges”, OECD Paris 2020 s-ProgressChallenges.pdf 2. Dr. Banu A. Anis Akhtar Sultana, Dr. Bhuvaneswari T.S., Dr. K. Sajida Begum, “A Study On The Sustainable Investment Funds With Sepcial Reference To State Bank Of India Esg Mutual Fund Shcemes” Turkish Journal of Computer and Mathematics Education 2021;Vol. (12 No.6):261-266. https://www.turcomat.org/index.ph p/turkbilmat/article/view/1363/113 3. Fisher‐Vanden K., Thorburn K.S., “Voluntary corporate environmental initiatives and shareholder wealth” Journal of Environmental Economics and Management 2011; Vol.62(3):pp.430‐445. 4. Harvey C., Liu Y., Zhu H., “ and the Cross-section of Expected Returns.” Review of Financial Studies 2016; Vol.29(1):5-68. 5. Hayat Usman and Orsagh Matt (2015), Environmental, social and governance issues in investing, or-investmentprofessionals.ashx 6. Jacobs B.W., Singhal V.R., Subramanian R., “An empirical investigation of environmental performance and the market value of the firm” Journal of Operations Management 2010; Vol.28(5):pp.430‐441. 7. Krüger P., “Corporate goodness and investing, institutions have accepted the change and adapted to it by creating a process of converting raw information to definitive ratings and scores, which has certainly helped people to make informed and calculated decisions without harming nature. Even though the process and ratings have shortcomings, still it is competing with the traditional form and outperforming it in certain aspects. We cannot refute that the corporate sector is the backbone of economic activity and striking a balance with right choices and strategies will create economic growth and efficient resource management using sustainable financing. ESG has and will benefit companies, investors and the society; thereby achieving a triple bottom line and all this could be the “new normal” in the world of finance. ACKNOWLEDGEMENT We would like to express our special thanks with gratitude to Hansraj College for providing us a platform for such a wonderful opportunity. We would like to extend our sincere and heartfelt gratitude to our teacher and mentor Dr. Ritika Seth Department (Assistant of Professor, Commerce, Hansraj College).We are thankful for her constant guidance, advice, and continuous motivation without which we would not have been able to complete this study. We would also like to acknowledge all the secondary sources and friends who provided us the information in the course October-December 2021 HANS SHODH SUDHA 78
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ESG and financial variables is interpreted as ESG being the cause and financial value the effect, however the transmission can be interchanged. COMPONENTS/CRITERIONS OF ESG: 3 key components of ESG are - Environmental, Social and (corporate) Governance aspects. Since ESG factors are often interrelated, there may be scenarios
ESG Investing: A Comprehensive Overview This online course is an introduction to environmental, social, and gover-nance (ESG) issues in Sustainable, Responsible, and Impact investing (SRI). It is designed to help profes-sionals gain an understanding of the fundamentals of ESG investing. Topics include: ESG methods, concepts and
ESG PORTFOLIO EXTENDED SUMMARY REPORT December 03, 2020 Portfolio Benchmark Weighted Avg ESG Score 6.20 6.03 Adjustment ESG Trend Positive 4.74% 15.81% LAGGARD AVERAGE LEADER Distribution of MSCI ESG Fund Ratings Universe Adjustment Total 0.81% 0.88% Score Adjustment 0.05 - ESG Trend Negative 2.02% 7.49% - ESG Laggards 1.91% 7.44% ESG Quality .
stated to apply to ESG ratings providers may apply to ESG data products providers, and vice versa. 1. The term ESG ratings and data products providers, as used in this report, covers providers who offer ESG ratings and/or ESG data products. Where there is a need to single out ESG data products providers who
ESG Investing is growing exponentially as more investors and issuers utilize ESG and Climate data and tools to support their financial decision making. MSCI ESG Investing Powering better investment decisions The world is changing, creating new and emergent risks Climate risks, regulatory pressures, social and demographic shifts as well as .
ESG quality, from the asset allocation mix, a question similarly posed by Schroders [2019]7. DWS Approach to ESG in SAA On the aforementioned point of inclusive versus exclusive ESG SAA approaches, we take the more inclusive approach. First, ‘ESG integration’ as for PRI is primarily a risk
Portion of cases where ESG affected portfolio construction LE 6.1 150/150 Pre-investment phase ESG risk management Compliance processes for negative screening LE 8 200/200 Post-investment phase ESG risk management Incorporation of ESG in regular reviews LE 9 150/150 Post-investment phase ESG risk management Identification of ESG incidents LE .
Example ESG Switchable Glass Sound Control Data ESG Switchable - Examples of Optical Performance* Thickness Standard Construction ESG Switchable Std dB Rating (Rw) ESG Switchable Acoustic dB Rating (Rw) 10 mm 4 mm Low Iron tempered glass x 1.52 PVB 0.4 mm LCD x 4 mm Low Iron tempered glass 35 37 12 mm 5 mm Low Iron tempered glass .
2 Korean Language Korean is an agglutinative language in which “words typically contain a linear sequence of MORPHS ” (Crystal, 2008). Words in Korean (eojeols), there-fore, can be formed by joining content and func-tional morphemes to indicate such meaning. These eojeols can be interpreted as the basic segmenta-tion unit and they are separated by a blank space in the Korean sentence. Let .
