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ESG (Environmental, Social and Governance) investing refers to a class of investing that is also known as “sustainable investing.” This is an umbrella term for investments that seek positive returns and long-term impact on society, environment and the performance of the business( https://www.esg.adec-innovations.com )
The link between ESG and financial performance
A study published in 2014 analyzed data from 190 of the largest US companies between 1993 and 2010. It found that high-sustainability firms tended to have a higher degree of long-term planning. They also measured non-financial criteria to a greater extent than their low-sustainability peers. The researchers also concluded that high-sustainability companies “significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance” . The authors of a German study published in 2015 reached a similar conclusion. Aggregating information from more than 2000 studies, they found that “the business case for ESG investing is empirically very well founded”. They also showed how the positive correlation of high ESG scores and corporate financial performance appears stable over time, and manifests itself across different sectors and regions. So far, then, the evidence is encouraging. High-sustainability companies tend to perform better and so, in theory, those who invest in them can expect to receive higher financial returns. ( Source : evidenceInvestor.com)
Advantages of ESG Companies :
A recent Bloomberg survey suggests that as early as 2025 almost 60% of Mutual Funds in Europe could be ESG compliant funds, this is in response to a survey among institutional investors which suggests that they are looking at significantly increasing allocation to this segment. https://www.bloomberg.com/news/articles/2020-10-19/almost-60-of-mutual-fund-assets-will-be-esg-by-2025-pwc-says While in India we are seeing early days of the ESG movement with a handful of funds making their debut recently and some of the other funds being reclassified as an ESG fund, am sure the next few years will see increasing action in the ESG space.
Some the existing ESG funds in India are : SBI Magnum Equity ESG Fund Quantum India Equity ESG Fund ICICI Prudential ESG Fund ( recently Concluded NFOs) More Asset Management Companies are planning for ESG fund launches in the coming months and ultimately SEBI may have a category for ESG funds as well.
With growing inequalities in Incomes, growing racial/gender discrimination, Environmental issues and of course the crying need for greater transparency in Corporate actions. Increasingly we will find that companies contributing positively to all the above will be favored upon. So we do expect ESG Funds to perform better in the future. So if you want to put your money where your heart is, then ESG funds must figure in your portfolio.