BTL 747 - ESG Investment

 

The Banking Tutor’s Lessons

BTL 747                                                                          24-01-2025

ESG Investment

ESG Investing stands for Environment, Social and Governance Investing. It is a strategy that aims to invest in companies with a strong ethical factor while simultaneously generating good returns for investors.

While there is no set benchmark as to what constitutes ESG investment, companies geared towards environment conservation or improvement, work towards social justice causes, such as poverty alleviation, or have a robust governance factor are considered promising targets for ESG investing.

Environment

The environment that we live in is polluted, over-populated, and depleting day by day. The oceans, seas, and rivers are increasingly being polluted with toxic wastes, damaging the ecological balance of our water bodies. With the glaciers melting and the temperatures rising, Global Warming has become an alarming reality. The increased number of vehicles on the roads, and the surging need for private vehicles have led to increased air pollution as well.

As a concern. India is now taking regulatory measures to ensure that companies follow the best practices for environment preservation and energy conservation.

Social

Businesses tend to be only profit-oriented. This objective leads to a lot of companies engaging in unethical practices to run their business.

To run business with ease, companies and corporations utilize local resources like manpower, raw materials, water, etc. from areas around their operation. In the bid to extract maximum productivity and profits, these resources at times can be used unfairly and irresponsibly.

The Indian Government introduced the Companies Act in 2013 to put an end to this wrongdoing. As per this act, companies above a definite size must compulsorily extend 2% of their profits towards being socially responsible in the society they operate. Protection of the environment, provision of quality education for underprivileged children, and women's employment are some of the initiatives that have come in place since the prevalence of the Companies Act. The company’s leadership ensures that all of this is being duly taken care of.

Governance

As an investor it is wise to invest in companies that follow corporate governance. This is because the transparency in conduct and integrity of companies plays a major role in the profit-generating capacity of the company. Companies that are adhering to market regulations and compliances have more prospects for steady and sustainable growth.

Importance of EGS investment

Sustainability: ESG as a parameter indicates that the companies are ethical and sustainable and are beneficial for the society and environment.

Brand Loyalty: ESG-centric companies have a higher brand loyalty that translates into higher profits which eventually becomes beneficial for the investors.

Multilevel Effect- Increased investments in the ESG driven companies will lead to a domino effect of betterment in the world we live in.

Improving Quality of Living - A company that is socially aware, keeps its employees and customers happy, is also likely to perform better. Through ESG investing, the world can be made a better place.

Disadvantages of ESG Investment

There is no set definition for ESG. This means that ESG investing can mean different things to different people. You will need to do thorough research before investing in an ESG fund.

There is a fear among the investment community that ESG investing has prompted an increase in greenwashing^#. This is a marketing strategy that companies portray to be more environment friendly than they are.

# Greenwashing is a deceptive practice where companies make misleading claims about their environmental impact. The goal is to make consumers believe that a company is more environmentally friendly than it actually is.

Sekhar Pariti

+91 9440641014