By Nikhil Kamath
Amidst the COVID-19 crisis, and an increasing concern over climate change and other environment-related challenges, the consideration of Environmental, Social & Governance (ESG) factors while making investment decisions is gaining traction.
In India, certain investors consider the ethical aspect of what they are channelling their capital into – often, this process involves negatively (or exclusionary) screening of certain companies engaging in tobacco, alcohol, or arms, for example. With increasing investor awareness over time, there appears to be a shift towards a more inclusionary approach to investing. This approach has come to involve positive screening with a primary focus on ESG factors, such as funds with exposure to renewable energy and eco-friendly transport.
Thematic indices such as the NIFTY100 ESG index and the NIFTY100 Enhanced ESG Index are designed the reflect the performance of companies within the NIFTY100 index that have an ESG score and steer clear of businesses engaged in tobacco, alcohol, controversial weapons and gambling operations. These indices beat the NIFTY50 benchmark consistently from 2012-2018, bringing to the forefront the idea that companies that effectively manage ESG challenges are generally more sustainable in the long-run, and can offer a better risk-adjusted performance.
Interestingly, COVID-19 has fostered a rising concern for the environment amongst Indian investors. According to a Morningstar report, sustainable funds in India have brought in upwards of $500 million from January to March 2020. The report also speaks of the “stickiness” of these funds. Since investments made in these funds are driven by the ESG values that investors firmly believe in for the long-run, they are more likely to stay invested even in times of poor performance, translating into a fascinating resilience in times where other funds are seeing unprecedented volumes of sell-off.
The millennial generation is vast, with 426 million millennials in India alone, almost 34% of the country’s population. This generation is more conscious of these factors and could pave the way for ESG investing to become a norm in subsequent years. Several American studies have shown that millennials have a higher tendency to contribute to socially responsible activities. In line with this, more companies will be forced to incorporate ESG factors into their business processes to cater to this generation’s tendencies.
In India, ESG investing is still a fledgling industry. With only three schemes that have not delivered spectacular returns so far, ESG investing may not excite too many investors at the moment. However, ESG-based investing is a theme that we anticipate is here to stay. With investors and regulators alike coming to terms with the adverse impacts of climate change and unsustainable business practices, non-financial factors are coming to the forefront, and most companies will have to align to this or risk being uncompetitive.
(Nikhil Kamath is the Co-Founder and CIO, True Beacon and Zerodha. The views expressed are the author’s own idea. Please consult your investment advisor before investing.)