DRIVING INTO THE WORLD OF ESG AND IMPACT INVESTING - Naman Gupta

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Although the acronym of ESG has been in trend for quite a while, its importance has increased tremendously over the course of one year due to the pandemic. The governments and the businesses have realised that unless adequate attention is paid to the concepts of sustainability, growth and development will be elusive for future generations. The increased popularity in India led to oncoming of ESG funds and as of 2021 almost 8 mutual fund schemes focussed on ESG are available to investors. The following article will try to dig deeper into the topics of ESG and Impact Investing and try to find out whether they have any impact on operational efficiency or is it just limited to a good image of the company in the minds of public.

ESG and Impact Investments though used interchangeably have significant differences. ESG stands for Environment, Social and Governance factors and hence extends beyond investments bringing about a positive change in the world. It also includes the measures taken internally to improve the firm’s performance. The E component of a company focusses on things like carbon footprints of a company, discharge of waste, use of energy etc. The S component of a company focuses primarily on human resource of an organisation. Issues like diversity and inclusion pertain to this component only. The final component G focusses on how effectively the company adheres to the regulatory environment. Transparency in financial reporting and ethical management procedures come under Governance. The focus is more on public market strategies and since the ESG norms persuade companies to report the results, the stakeholder advocacy increases automatically. Impact investments is confined to private market and that specifically target United Nations Sustainable Development Goals. The target of business into which these investments are made should be defined accurately.

I personally believe that company with a strong ESG proposition will eventually do better in the long run as compared to a firm which has a weak proposition. Since they have to be made public, the company will enjoy a cleaner image in the minds of the government and hence find it easier to get the necessary resources and licenses for expansion. Since social component is one of the pivotal elements, the firm will be able to attract and retain top talent more effectively. In some instances, efforts of the firm to save resources have also contributed immensely to their bottomline. Levi’s which came up with its environment friendly jeans using less water in its production is a prime example of the aforementioned phenomenon.

My view is in complete contrast to the view held by Aswath Damodaran who firmly believes that it is a gimmick due to the lack of clarity in metrics that measure the impact. I highly recommend you to read his blog and answer the underlying question of whether ESG helps a firm and investors in the long run or not.

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