scorecardresearchWhat are ESG stocks? Should you have them in your portfolio

What are ESG stocks? Should you have them in your portfolio

Updated: 13 Jul 2022, 10:38 AM IST
TL;DR.

Given the rise in activism and sustainable investing, ESG investing is a very good potential opportunity for investors. Let’s understand the theme deeper and why you should invest.

Given the rise in activism and sustainable investing, ESG investing is a very good potential opportunity for investors.

Given the rise in activism and sustainable investing, ESG investing is a very good potential opportunity for investors.

Many Indian companies are now becoming more and more conscious of the environment. This has led to the start of a new theme regarding the environment, social and governance (ESG) to raise awareness. Growing environmental issues, social injustice, and better disclosure requirements have led to an increase in investments in firms that pay more attention to environmental, social and governance issues.

ESG stocks are company stocks that focus on sustainability and environmental concerns rather than just considering its bottom line. They aim to profit but with minimal impact on the environment. More and more companies are making ESG disclosures these days in their reports showcasing how they have helped raise awareness and contribute to the betterment of society. Such companies are focussing more on sustainable choices, more eco-friendly operations, minimizing the impact on biodiversity, etc.

Many big names including Infosys, TCS, HDFC Bank, HDFC, Havells, UltraTech Cement, Godrej Consumer, L&T, Titan, Adani Enterprises, Tata Power, etc, are contributing heavily to this new theme.

Godrej Consumer Products and Havells India are among the 12 Indian companies that are a part of the Dow Jones Sustainability Index (DJSI) used for assessing environmental, social and governance (ESG) performances.

ESG first came into focus in the United Nations Global Compact report issued in 2005. It stated the need to combine ESG factors into equity markets to profit both companies and the environment. Since then, ESG criteria have been used to identify such stocks. It is no longer a niche concept. More and more firms are looking to contribute to the betterment of the environment and society.

ESG as an investment prospect

Generally, investors focus on returns, balance sheets, earnings of a firm before investing in its stock. But now, with the focus of the world moving towards issues like climate change, deforestation, carbon emissions, etc, there is an urgent need to drive social changes and provide financial support to such issues. Hence, regulators across the world are nudging companies to contribute more to these concerns and better disclosures of their contributions.

Even investors want to associate with firms that are responsible and working towards sustainability. Companies that are generating high profits but are low on ESG scoring are losing prominence. More and more investors are investing in firms that are moving towards more eco-friendly and green solutions. This has become the need of the future and thus showcases immense potential.

If you want to identify ESG firms to invest in, rating agency CRISIL generally comes up with an ESG score for Indian firms based on the knowledge available in the public domain. The scores vary from 1-100 with 100 being the best ESG performance. A higher ESG score not only makes a company a good potential investment but also showcases that the firm is working for the betterment of society.

Many ESG funds are now available in the market to choose from. The assets under management (AUM) by ESG funds globally are over $35 trillion. In India, this figure is around 115 billion as of July 2021, since this concept is fairly new here.

While ESG is still an upcoming theme in India, globally it is a very in-demand investment theme, especially in a post-Covid world.

Given the rise in activism and sustainable investing, it is now time for every investor to consider investing in this theme as more and more companies are now establishing good corporate social responsibility. ESG investing will pave the way for a sustainable as well as a profitable future.

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The chart indicates ESG risk score from negligible to severe
First Published: 13 Jul 2022, 10:38 AM IST