ESG Stocks: The Future of Sustainable Investing
As the world becomes more environmentally conscious, investors are focusing on companies that prioritize sustainability and environmental concerns rather than just profit. This has led to the rise of ESG stocks - companies that focus on the environment, social justice, and governance in their business operations.
In India, many companies are making ESG disclosures in their reports, showcasing their commitment to sustainable choices, eco-friendly operations, and minimizing the impact on biodiversity. Companies like Infosys, TCS, HDFC Bank, and Godrej Consumer are contributing heavily to this theme.
ESG first came into focus in 2005 when the United Nations Global Compact report stated the need to combine ESG factors into equity markets to profit both companies and the environment. Since then, ESG criteria have been used to identify such stocks. Today, ESG is no longer a niche concept. More and more firms are looking to contribute to the betterment of the environment and society.
Investors are also taking notice. Regulators across the world are nudging companies to contribute more to environmental and social concerns and to provide better disclosures of their contributions. Investors want to associate with firms that are responsible and working towards sustainability. Companies that are generating high profits but are low on ESG scoring are losing prominence. More and more investors are investing in firms that are moving towards more eco-friendly and green solutions.
If you want to identify ESG firms to invest in, rating agency CRISIL generally comes up with an ESG score for Indian firms based on the knowledge available in the public domain. The scores vary from 1-100 with 100 being the best ESG performance. A higher ESG score not only makes a company a good potential investment but also showcases that the firm is working for the betterment of society.
Many ESG funds are now available in the market to choose from. The assets under management (AUM) by ESG funds globally are over $35 trillion. In India, this figure is around ₹115 billion as of July 2021, since this concept is fairly new here.
While ESG is still an upcoming theme in India, globally it is a very in-demand investment theme, especially in a post-Covid world. Given the rise in activism and sustainable investing, it is now time for every investor to consider investing in this theme as more and more companies are now establishing good corporate social responsibility. ESG investing will pave the way for a sustainable as well as a profitable future.