ESG investing or investing in companies with sound Environmental, Social and Governance standards seems no longer as just another fad. Although examples of responsible investing have been reported as early as 1950s, it was not until 2014 that a UN report actually coined the word ESG.
ESG stands for Environmental, Social and Governance, which forms crucial non-financial factors to analyze investment opportunities.
Rating agency Crisil recently published a report titled ESG Gauge to examine the opportunities in India. It mined data for 225 companies. The report published in June is can be downloaded from here.
The Crisil report finds that as of 2019, India fetched $29 billion from international socially responsible funds. However, AUMs of the 10 ESG funds in India as of March'21 stood at only $1.4 billion -- barely 4 percent. The scope for ESG was as high as $37.8 trillion which was the asset size of Global ESGs as of Mar'21.
The report goes beyond traditional definitions to categorize several factors within ESG.
E- Environmental: Water-Use, Resource and Bio-diversity, Waste generation & Recycling. Energy & Emissions.
S- Social: Employee management, Supply Chain management, Communities, Customers.
G- Governance: Board Composition, Board Independence, Functioning and Experience, Management Track Record & Control, Disclosures and Shareholder relations, Compliance/Controversy checks.
The report clearly highlights that focusing on ESG has benefits for organizations in the form of nurturing topline growth, enhancement of public image and attractiveness to investors. Of course, integrating ESG goals within business will leads to long-term sustainability and does a lot of good to the society.
For investors, non-ESG companies are likely to face 28 percent more risks annually compared to ESG-integrated firms (UN PRI)
Crisil surveyed 100 respondents to conclude that 73 percent of those who considered ESG scores in their evaluation relied on Governance, followed by Environmental (46 percent) and Social issues (38 percent). Investor preference to ESG based scoring has gone through a major change -- over 50 percent of respondents said ESG was critical to fund-raising and internal decision making as opposed to 36 percent who found it somewhat useful.
The agency also used a proprietary ESG methodology to score 225 companies traded regularly on the indices. Companies were marked on a score of 100 with the maximum weightage given to Governance (40%) followed by E(35%) and S (25%). The scoring for Environmental and Social factors also included a portion of Sector Score.
Of the 18 sectors Crisil analysts examined, IT and Financials fetched the highest sector score. In fact better than the Renewables sector.
Sectors that fared poorly include FCMG-cigarettes and alcohol. The average ESG ranking here was lower than metals and mining (second lowest) and Oil & Gas (third best).
Some common issues exist across sectors such as environmental disclosures, gender diversity, independent directors, defined dividend distribution strategy, CEO tenure, and even attrition. On Gender diversity, the research found only 10 percent women employees on average. Women in the corporate board were limited to nearly 17 percent. In fact 12, five of them large cap firms had no women on the board.
Infosys topped the ESG score with a total score of 79. Infy scored the highest on E and G. MindTree (77), Tech Mahindra Wipro Ltd (75), L&T Infotech (72) were the other leading top scorers.
Among financial institutions, Kotak Mahindra Bank had the highest ESG score at 74. HDFC Bank (72), IndusInd Bank (72), Axis Bank (71) and ICICI Bank (70) follow.
State Bank of India scored the highest in social category with a score of 72. Canara Bank and Rural Electrification Corporation Ltd (REC) were second best with score of 71 each.
Disclaimer: Image is attributed to Pixabay.