ESG: Green wave in a pandemic
Covid has proved to be a shot in the arm for ESG funds in India
Capitalism has always been criticized as a weapon for institutional exploitation of the poor by the rich of the world. Undoubtedly, the signs of a systemic bloodsucking and misuse of power by those at the top over the centuries are pretty evident. But no system is perfect and there is always a scope of continuous improvement.
ESG fund is a step for improvement of this system. It allows the investors to put themselves into a conversation with the company raising concerns that matter the most to them. It gives investors an option to siphon there funds towards sustainable organizations. ESG funds’ returns over the years are testimony to the fact that business and ethics can go hand in hand. The two are not mutually exhaustive disciplines. Almost 80% of the ESG inflows across the planet is in Europe.
Nowadays, the business of business is not limited to business
ESG funds have been quite in markets abroad but not in India. ESG had humble beginnings in India but is garnering lot of eyeballs nowadays. During the pandemic, it has emerged as the new darling of the Indian market. People are ready to embrace the companies that do not harm the surroundings and act as custodians of resources for coming generations.
A 1% increase in particulate matter 2.5 resulted in 5.7% increase in Covid deaths
Meaning of ESG:
ESG consists of three components:
- Environmental: Carbon footprint, Water and waste management etc.
- Social: Data privacy, safety and security of all the stakeholders involved
- Governance: Corporate malpractices, fraud, self-centered senior management
How ESG metrics are calculated:
ESG identifies risks for an organization in that industry and assigns weightages to it based on its impact and likelihood. A composite score is calculated for each of the company and it is ranked within its industry. The best part of this method is that the calculation incorporate the risks that are very specific to the industry it operates in and are generally omitted in traditional financial reporting.
SEBI regulations over ESG reporting:
SEBI has requested Top 1000 listed companies to release annual Business Responsibility and Sustainability report (BRSR) on a voluntary basis in FY22 while the report should be released on a compulsory basis from FY23 onwards. The reportings will serve the investors in making an informed decision regarding the scope of the businesses the company is involved in.
ESG’s past success in risk identification
ESG framework can help to avoid companies with bad practices in place
Equifax data breach came out in public somewhere in 2017 but most of the ESG funds had downgraded it a year back credit goes to the bad data storage practices in place. Another example could be of Facebook, which is not included in most of the ESG funds owing to its bad reputation regarding user’s data monetization. Facebook’s absolute ESG score is not bad but it ends up at the lower end of the spectrum in the tech industry.
The biggest roadblock in ESG’s success
The biggest roadblock is lack of guidelines over the loose definition of an ESG. The criteria used for defining a company as ESG should be scrutinized closely. For example, Amazon’s carbon footprint increased 15% in 2019 but it plans to achieve carbon neutral status by 2040. There is lack of clarity over whether such companies should be incuded or excluded as ESG.
