ESG investing is used synonymously with sustainable investing or socially responsible investing. While selecting a stock for investment, the ESG fund shortlists companies that score high on environment, social responsibility and corporate governance, and then looks into financial factors.
Features of ESG Investing
- Fund houses say modern investors are re-evaluating traditional approaches, and look at the impact their investment has on the planet.
- As a result of this paradigm change, asset managers have started incorporating ESG factors into investment practices.
- There are over 3,300 ESG funds globally and the number has tripled over the last decade. In India, as of now there are three schemes – SBI Magnum Equity ESG, Axis ESG and Quantum India ESG Equity – following the ESG investment strategy.
- Companies will be forced to follow better governance, ethical practices, environment-friendly measures and social responsibility, due to gaining momentum of ESG funds.
- Environmental risks created by business activities have actual or potential negative impact on air, land, water, ecosystems and human health.
- Company environmental activities considered ESG factors include managing resources and preventing pollution, reducing emissions and climate impact, and executing environmental reporting or disclosure.
- Social risks refer to the impact that companies can have on society. They are addressed by company social activities such as promoting health and safety, encouraging labor-management relations, protecting human rights and focusing on product integrity.
- Corporate governance is all about integrity and honesty of the management. This aspect also has the potential to adversely impact investors’ wealth creation prospects in the long run.
- ESG investing is all about investing ethically for financial wellbeing in the long run.
Similar Types of Investing
- Socially Responsible Investing started in the 1970s as investors mostly used negative screening methods to exclude investments in guns, tobacco, gambling, adult entertainment and other vices. Investing in these stocks was seen as supporting morally bad or socially irresponsible businesses.
- ESG investing, though sometimes considered synonymous with SRI, is its own class of investing. ESG investing is the integration of environmental, social and governance factors into the fundamental investment process.
- Impact investing is considered the most advanced of the three kinds of sustainable investing. It involves generating a measurable environmental and social impact alongside financial returns.
