Environment, social responsibility, and corporate governance have of late emerged as key themes for investors in India. The asset size of ESG funds has ballooned nearly five times to Rs 12,300 crore over the last couple of years. Earlier this week, the National Stock Exchange (NSE) launched NSE Prime, a framework that allows companies to submit to standards of corporate governance that are higher than those required by existing regulations.
Market experts say investors in funds and companies would do well to keep the factors of environmental sustainability, social responsibility, and corporate governance in mind for long-term sustainability of investment returns. However, some are sceptical of the possibility of “greenwashing”, and of fund managers over-weighing certain stocks once other options are deemed non-compliant with ESG investment parameters.
The expression is used synonymously with sustainable and socially responsible investing. While selecting a stock for investment, an ESG fund shortlists companies that score high on environment, social responsibility, and corporate governance, and then looks at financial factors. With the overall increase in awareness, and with regulations moving in this direction, investors are re-evaluating traditional approaches and considering the impact of their decisions on the planet.
As ESG funds gain momentum in India, companies will be forced to improve governance and ethical practices, and act with greater social and environmental responsibility, fund managers say. As the policy framework changes, companies that do not alter business models or become more environmentally sustainable, could have their revenue and profits impacted in the long term, they say. Globally, many pension funds and sovereign wealth funds do not invest in companies that are seen as polluting or socially not responsible.
One of these is the possibility of “greenwashing”, understood as an act of conveying a “false impression or providing misleading information about how a company’s products are more environmentally sound”.
In an agenda note published on December 21 on ‘How to address sustainable investment backlash and improve ESG reporting’, the World Economic Forum noted that greenwashing is a top concern among global institutional investors, “cited by six in 10 respondents as an issue when selecting sustainable investments, according to a Schroders Institutional Investor study. It’s also been known to be a problem for retail investors, who especially struggle to decipher complex ESG investments”.
Investment experts have also pointed to the tendency of fund managers to over-weigh certain stocks and companies in a situation where most large investment-friendly companies have fallen short of the qualitative and quantitative parameters used for ESG investing.