ESG Investments have attracted wider attention from both investors and customers worldwide. These kinds of investments largely follow a triple – bottom – line approach that combines financial returns with environmental and social norms. Investment decision – making processes and investment analyses are increasingly emphasizing the sustainability of investments and adherence to environmental, social and governance (ESG) norms. These forms of investments always involve a contradiction between simple profit maximisation and ESG integrated profit maximization options.
One of the crucial ingredients of sustainable investment is transparent ESG reporting and disclosure of information. While ESG reporting and disclosure have a legal standing in many countries, they are voluntary in nature in many others. The reporting and disclosure of information are vital for investors and customers to understand corporate houses’ long-term business and investment strategies and assess their sustainability quotient.
The increasing perils of the environmental and climate – related crisis have recently emerged as compelling factors for countries to mobilize private investors as important stakeholders in achieving the sustainable development goals (SDGs) by incorporating ESG factors into investment processes and investment decision – making systems. There is an expectation that business entities will play a pivotal role in and bear significant social and environmental responsibilities for taking appropriate measures to minimize the mounting environmental and societal crisis.
ESG Investments – Global Scenario
- Globally, ESG investments have achieved momentum as a mechanism attracting both investors and consumers. There are three direct drivers of such rise in ESG investments.
- Increasing recognition that integrating ESG factors could generate salutary effects on investors risks and returns.
- Aspirations of the beneficiaries and clients about the transparency of the money that companies are investing and the role that ESG investments can play in meeting these aspirations.
- Increasing legal framework for ESG investments and the legal imperatives for such investments in various countries across the world.
Observations have indicated increasing interest in ESG integration in investment decision making processes worldwide, with an annual growth rate of 24%. Geographically, the US and Europe are the largest contributors. Though ESG integration has yet to accelerate in Asia, there has been a surging demand for ESG investments in Asian countries. Countries like Japan are the front-runners, and several other countries are extending their ESG investments.
ESG Investment Scenario in India
ESG Investments in India are at very nascent stage of development, though they have been evolving fast. Considering India’s developmental priorities, the integration of ESG elements into the investment decision making processes is becoming crucial to address the persisting societal challenges and increasing environmental and climate threats.
Recently, the Government of India has realized the importance of integrating ESG factors into business processes and has actively promoted this through various reforms and regulations. Businesses in India have realized the imperative of seizing the opportunity to tap renewables, and more corporate entities are adopting this approach.
Indian corporations are increasingly integrating ESG factors into their business decision making process. For instance, several asset-management companies, such as Axis Mutual Fund, ICICI Prudential and Aditya Birla Sun Life, have launched ESG integrated scheme and are increasing adopting ESG norms in their investment decision-making processes. It is being observed from the National Stock Exchange (NSE) that ESG indexed companies have fared well compared with non-ESG indexed companies.