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Why India should focus on ESG?

INTRODUCTION

The terms ‘environmental, social, and governance’ are referred to as ESG. Sustainability is viewed holistically by ESG, who believe that it encompasses more than just environmental concerns. The ideal way to define ESG is as a framework for stakeholders to understand how an organization is handling opportunities and risks connected to environmental, social, and governance criteria. Although the word ‘ESG’ is frequently used in relation to investing, other parties including the investment community, clients, partners, and staff are considered stakeholders. They’re all becoming more and more curious about how sustainably an organization operates.

PRINCIPAL POINTS

  • ESG is a framework that aids stakeholders in understanding how a company handles opportunities and risks related to sustainability issues.
  • ESG has developed from earlier movements that prioritized corporate generosity, pollution reduction, and issues of health and safety.
  • ESG has altered many capital allocation and investment decisions.

ESG

  1. Environmental: The environmental impact(s) and risk management procedures of an organization are referred to as environmental criteria. These include the firm’s overall resilience to physical climate threats, stewardship over natural resources, and direct and indirect greenhouse gas emissions (like climate change, flooding, and fires).
  2. Social: The connections an organization has with its stakeholders are referred to as the social pillar. An organization’s impact on the communities in which it operates and on supply chain partners, particularly those in developing economies where environmental and labour standards may be less stringent, are other examples of factors that a firm may be measured against. These factors include metrics for human capital management (such as fair wages and employee engagement metrics).
  3. Governance: Governance describes the direction and management of a business. ESG analysts will work to gain a deeper understanding of how shareholder rights are perceived, how incentives for leadership are related to stakeholder expectations, and what kinds of internal controls are in place to encourage leadership accountability and transparency.

SOCIAL ASPECT OF ESG

The social benefits of ESG go beyond providing access to goods and services for various social groups. It also extends beyond offering work to everyone, regardless of gender, colour, religion, or other characteristics. Despite their importance, these things do not entirely define what it means to be socially responsible.

However, the social impact extends beyond the immediate environment. Additionally, it covers how the organization treats and cares for its personnel. this covers things like paid maternity leave, paid sick leave, paid time off, and pay parity, among other things. All of these factors have an impact on the workers, their families, and their social interactions.

WHY IS ESG IMPORTANT IN TODAY’S WORLD?

We can all agree that having an ESG policy at a company is a good thing. However, it’s crucial to keep in mind that while these developments are positive, they aren’t yet complete and shouldn’t be fully anticipated from such a young movement. While we should support these initiatives, we shouldn’t expect them to be miracles; rather, they should be the beginning of miracles. These initiatives indicate strides in the right direction. People today are becoming more conscious of how their activities impact everyone and everything in their environment. It’s time to take matters into our own hands and take action if we want a different future for everyone—including ourselves, our children, the earth, and all living things.

ESG’s IMPORTANCE IN THE BUSINESS?

There are several reasons which show that ESG is important to a business. It is an important factor in company performance and is the best indicator of environmental, social, and governance success.

  • It might enhance a business’s standing and image, which might draw in new investors.
  • By introducing new legislation, governments all across the world have the power to influence the triple bottom line.
  • By requiring innovation from businesses, it creates a variety of fresh options.
  • It benefits the environment, which benefits your grandchildren and the future generations of your family.

WHAT ARE ESG FUNDS?

ESG funds are essentially funds where money is invested in the bonds and stocks of businesses that do well on metrics including the environment, the social sector, and corporate governance. It made investments in businesses that use environmentally friendly practices. Here, the company’s sustainability is evaluated in light of ESG considerations. It will only cover sovereign bonds from nations with high sustainability ratings when it comes to bonds.

IMPORTANCE OF THE FUNDS

  • First of all, if a company is sustainable, it demonstrates a greater level of social and financial responsibility. It is crucial because only investor pressure will force firms to act responsibly toward the community.
  • This demonstrates how important ESG funds are to the community. As the government focuses more on renewable energy and environmental challenges, it is significant from the investor’s perspective. Additionally, it is anticipated that in the future, companies with significant environmental pollution levels will be subject to the tax.
  • More ecologically conscious, healthful, and natural products are becoming more popular among consumers, who are also changing their lifestyles. Companies must make decisions accordingly as a result of the government’s stricter governance regulations.

TOP ESG FUNDS IN INDIA

  1. SBI Magnum Equity ESG FundThis is the ESG segment’s oldest available fund. This fund has been around for at least 8 years. It debuted on January 1st, 2013. Its fund expense ratio is 1.29%, which is greater than that of other funds in this category. This fund has given an annual return of 15.84% since it was founded.
  2. ICICI Prudential ESG Fund- This fund was officially launched on January 22, 2020. It has been around for almost 1 year and 8 months. On average, it has given a return of about 39.35%. It has generated a return of about 60.52% over the past year. Avenue Supermarts Ltd., Wipro Ltd., Bajaj Finance Ltd., Tata Consultancy Services Ltd., and Nestle Ltd. have received the majority of their investments. The expense ratio for this product is 0.48%, which is lower than what other thematic ESG funds charge.
  3. Quantum India ESG Equity Fund- It is a medium-sized fund with 1920 crores of rupees in assets under management. On September 21st of last year, the fund was established. The expense ratio it charges, 0.6%, is comparable to that of other ESG thematic funds in this market. Compared to its competitors in this market, this fund has a lower exposure to the financial and technological sectors, investing its money in industries including FMCG, chemicals, healthcare, and financials. Regarding the returns, since its debut, it has been able to produce returns of 42.59% annually. The portfolio allocation for this fund is split 95.9% into equities, 0.02% into debt, and 4.08% into other alternatives.

WHAT IMPACT DOES ESG HAVE ON THE ECONOMY?

ESG is resulting in a more sustainable society and an improved environment. It is helping to lower carbon emissions across major economies, reduce deforestation and water waste through better irrigation practices, improve energy efficiency within companies, and create a circular economy. Through its influence on companies, ESG is increasing corporate transparency and accountability. It is empowering consumers to make more sustainable decisions about the products they buy and the companies they support.

WHY FIRMS IN INDIA SHOULD FOCUS ON ESG?

India is seeing an increased focus on ESG. According to a recent report by IT industry group Nasscom and Boston Consulting Group, global companies’ growing efforts in enhancing their environmental, social, and governance goals (ESG) will boost revenue for Indian technology and services companies. Furthermore, several outside factors contributed to the adoption of ESG initiatives by digital companies. Several sizable multinational corporations are requiring that vendors adopt specific ESG objectives to compete for their business. Investment in ESG is a business necessity for organizations. Start-ups are being pushed to focus more on incorporating these into their overall strategy by investors’ requests for them to establish an ESG strategy.

While the larger businesses already had well-defined objectives and an ESG roadmap in place, it would work with the smaller businesses to integrate these into their strategic priorities, begin the process of internal adoption, and develop customer-facing solutions. It was crucial to comprehend the techniques that, given the company’s size and business aims, would apply to it.

Indian enterprises are being forced to reconsider their strategy as a result of the uncertain state of the Indian economic environment and the amplified effects of many environmental and societal disruptions. ESG is developing as a concept to produce long-term value for all stakeholders. The COVID-19 pandemic has highlighted the value of ESG as a fundamental strategy for long-term corporate resilience. Businesses are considering moving beyond non-financial reporting and beginning to report using an integrated profit and loss approach, which aims to correlate or monetize the favourable and unfavourable effects of business operations and products through a variety of capitals, thereby assisting in the creation of long-term value.


REFERENCES

  1. Kanishka Tayal, ‘Top 5 ESG Funds in India’ , available at Top 5 ESG Funds in India (finology.in)
  2. Shailesh Tyagi, ‘How ESG factors can help further proof Indian businesses’, https://www.ey.com/en_in/climate-change-sustainability-services/how-esg-factors-can
  3. What is ESG and why is it important, available at https://www.esgthereport.com/what-is-esg-and-why-is-it-impor

This article is written by Aditi Jangid, a 1st year law student pursuing her bachelor’s degree from Delhi Metropolitan Education (Affiliated to GGSIPU).

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