ESG Funds Outperform Their Peers

With governments, regulators, investors, and citizens across the globe aligned towards making the earth a better place to live, sustainability has emerged as a key driver across the value chain. The need for sustainability has gained prominence as it begins to showcase visible benefits, such as getting more revenue opportunities, lowering risk, enhancing the public image, and reducing regulatory issues. What’s more, this is also seen as a pressing demand from institutional and millennial investors.

What is sustainable investing?

Simply put, it’s an investment strategy that positively impacts the society, environment, and people in general, while generating monetary gains. All stakeholders are now more conscious about the world they live in, and the world that they would leave behind for the next generation, thereby making a strong case for policies that promote the community and environmental causes. Investors are no different. Sustainability-focused investors are conscious of how governments, corporates, and people in general deal with environmental, social, and governance (ESG) issues as they increasingly put a substantial premium on it.

At its core, any normal investing technique seeks investment opportunities to deliver returns on investors’ money, while minimizing risks. Sustainable investing is more about keeping a long-term perspective, keeping in mind the businesses’ impact on ESG issues, going beyond just financial performance and returns. Hence, sustainable investing can be viewed as a fair progression of traditional investing towards betterment.

In no way does sustainable investing reject the fundamental principles of money management. In fact, it adds to it and compliments it. It also takes into account inclusivity and considers diverse stakeholders, their participation, contribution and growth, which in turn leads to a well-rounded and more wholesome business model. The idea is to invest money in areas and businesses that promote positive societal and climate impact, responsible corporate governance, and inclusive policies, while taking a long-term view on financial returns.

Why is sustainable investing important?

The S&P Global Market Intelligence data shows that from December 31, 2020, to May 17, 2021, 16 of 27 ESG-focused funds with more than $250 million in assets under management, performed better than the S&P 500. Those outperformers rose between 11 per cent and 29.3 per cent in that same period. In comparison, the S&P 500 increased 10.8 per cent in the same period.

As per the Global Sustainable Investment Alliance, an organisation promoting sustainable investments, globally the Socially Responsible Investing assets grew at a compounded annual growth rate (CAGR) of 13 per cent from 2012 to 2020, from the $13.3 trillion in 2012 to the $35.3 trillion in 2020.

As per Bloomberg data as on June 2021, companies with sustainability issues have underperformed vis-à-vis the Nifty ESG Index for the period 2011-2021. The Nifty 100 ESG Index’s 10-year CAGR (from August 2011 to June 2021) was 16.2 per cent, as against 14.4 per cent of the Nifty 100 index during the same period. 

Policy initiatives on ESG

India is on track to achieving its climate goals well before the target date of 2030. Recently, India prescribed new ESG reporting requirements for the top 1,000 listed companies based on market capitalization. Besides, the government’s focus on digital transformation is acting as a catalyst in creating faster, greener, more equitable, and inclusive business models.

On the environment front, the government has showcased its commitment by taking some serious steps to push the adoption of electric vehicles, renewable energy resources, implementing a vehicle scrappage policy, and setting industry effluent standards and rules for pollution emission and waste management. The Swachh Bharat Abhiyan, rebate on electric and CNG vehicles, capital subsidy for backward areas, and capping of prices on essential pharmaceutical products are some other measures implemented to bring about a positive social change.

One of the key aspects to remain a favoured investment destination is to have a robust governance framework in place. Recognizing this, the government has implemented stringent corporate governance norms, rules for women’s representation on boards, and mandatory sustainability disclosure.

Approaching sustainable investments

Though retail investors can independently invest in highly-rated ESG stocks, the best way forward would be to invest their hard-earned money in ESG-focused funds. Fund managers from asset management and life insurance companies have the expertise to evaluate companies not only on their financial performance and growth prospects but also on their ESG initiatives.

As awareness of ESG principles grows, there is positive pressure on organisations to shift swiftly towards building sustainable business models, which also make them attractive for ESG-focused funds. Industries and businesses that consider ESG factors as must-haves, and not just as feel-good, are increasingly being recognised and preferred by money managers, investors, and millennials, setting the stage for a long-term approach to take center-stage in businesses.

ESG-focussed funds offer a win-win proposition to investors by generating returns as well as ensuring that corporates fulfill their responsibility towards ESG issues.

The author is Executive Vice-President, ICICI Prudential Life Insurance Company Limited

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.