Understanding ESG Stocks

3 min read

Every business is deeply intertwined with environmental, social, and governance concerns (ESG). ESG refers to three central factors responsible for maintaining the sustainability of any investment. It was derived from the ‘Triple Bottom Line’ (TBL), coined by business writer John Elkington in 1994. TBL is one framework for focusing on People, Planet and Profits’ (PPP). It suggests that businesses should focus on each of the three ‘P’s and not just on ‘Profits’, since they are equally important for any commercial enterprise to be sustainable. This concept evolved into the focus of ESG, which today is the bedrock of Sustainable and Responsible Investing (SRI).

What Is ESG Investing?

ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities.

E stands for environmental component, which addresses how the company affects the planet through:

  • Climate change policies
  • Greenhouse gas emissions
  • Carbon footprint and carbon intensity
  • Water usage and conservation, overfishing, and waste disposal
  • Renewable energy usage
  • Recycling and disposal practices
  • Green products, technologies, and infrastructure
  • Green initiatives like, promoting carpooling, public transportation, bicycle commuting, etc.

S stands for social component, covering issues affecting employees, customers, consumers, suppliers, and the local community as well; eg:

  • Employee treatment and compensation
  • Employee engagement and turnover
  • Employee training and development
  • Employee safety policies and sexual harassment prevention
  • Diversity and inclusion in hiring, promotions, and pay increases
  • Ethical supply chain sourcing
  • Mission or higher purpose
  • Customer service performance
  • Consumer protection activity, including lawsuits, recalls, and regulatory penalties
  • Lobbying efforts and public stance on social justice issues

G stands for governance component, which relates to board independence, leadership effectiveness, and business ethics. Specific topics include:

  • Executive compensation, bonuses, and perks; along with their long-term business vision
  • Policies that define and enforce ethical business practices
  • Diversity of the board and management team
  • Potential for conflicts of interest for board members
  • Shareholders’ ability to nominate board candidates
  • Whether term lengths differ among board members
  • Separation of the chairman and CEO roles
  • Whether the company issues dual- or multiple-class stock
  • Transparency of shareholder communications
  • History of shareholder lawsuits

It is important to understand that ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report. 

Investing in the stocks of the companies that adhere to strict and high standards of corporate governance, are responsible towards the environment, and address issues relating to its employees and the society at large is termed as ESG Investing.

What are the advantages of ESG investing?

Focusing on ESG stocks can provide investors with a host of benefits. Let’s take a brief look at a few of them. 

1. ESG investing reduces risk 

One of the primary and most important advantages that you get to enjoy by investing in ESG stocks is reduced portfolio risk. Companies that focus on these three elements of ESG tend to be far less volatile with lower downside risks compared to entities that don’t focus on these issues.  

2. ESG investing leads high returns

Another result of focusing on ESG stocks is that you get the ability to earn higher returns on your investment. There has been considerable amounts of research from time to time which has fairly proved that companies that focus on ESG tend to generate higher returns than companies that don’t. 

3. ESG stocks generally have strong leadership 

ESG is a concept which makes the company sustainable in case of the future crisis. Only far sighted people with strong vision focus on ESG. Companies with a strong focus on ESG usually are driven by strong and capable leadership. Thanks to better decision making, such companies do well in the long term. 

4. ESG investing promotes ethical companies

An indirect advantage of ESG investing is that it has the ability to promote ethical companies. When a large number of investors resort to evaluating companies based on environment, social and governance aspects, the companies are also likely to act more ethically and responsibly.

ESG Mutual Fund Offerings in India:

Most top fund houses, including SBI Magnum Equity, Aditya Birla Sun Life, ICICI Prudential, Quantum India, Kotak Mutual Fund, and Axis Mutual Fund offer ESG investment opportunities. 

ESG funds use parameters such as carbon footprint and new employment generation strategies to assess the ESG impact of the companies. Thus, companies with higher carbon outputs such as tobacco manufacturers, coal miners, oil and gas companies, and fossil fuel-based power generators typically do not participate in ESG fund portfolios. On the other hand, companies in the technology, renewable energy, healthcare, and FMCG space feature heavily in these portfolios.

If you want to achieve strong financial returns while supporting companies with sustainable, future-oriented business practices, then ESG investing may be right for you. ShareIndia experts help you in choosing the right set of securities to invest; tailor made for portfolio requirements.

Click here to get in touch with ShareIndia Experts.

Disclaimer: Any Advice or information in the post is a general advice for education purpose only and is not responsible for generating any trading strategy for anyone, please do not trade or invest based solely on this information.

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