The rise of ESG investing

The world of investing is always innovating. Over time, many strategies, models, systems, etc., have made inroads into the investment world. Many of these had their genesis in the developed markets. These days, fund investors frequently come across 'ESG' funds which are being launched by many fund houses. In the last one year, ending December 2020, seven such funds have been launched. Given the rise of this new category of funds, we felt it would make sense to delve deeper to understand what it offers and whether one should invest in it. 'ESG' funds seek to invest in businesses that score high on environmental, social and governance (ESG) standards. Over the last decade, ESG investing has become quite a rage in the developed markets, as seen from the surge in the number of funds and indices constituting socially responsible investing, impact investing, sustainable investing, etc. This trend has its roots in 2005, when Kofi Annan, the then UN Secretary-General, had invited a group of the world's largest institutional investors to develop the Principles for Responsible Investment (PRI), which centred around tackling the ESG issues (see the illustration 'A broad ESG framework'). This created the PRI network, the world's leading proponent of responsible investing. The 521 signatories of the PRI group manage more than $103 trillion (as of March 2020) in line with the ESG principles. ESG assets have grown at about 22 per cent per annum since the inception of this theme in 2006. Global and Indian perspectives While ESG funds are new to Indian investors, there are more than 3,000 such schemes available globally. This suggests a welcome shift from the sole focus on profitability at any cost to sustainable growth. Businesses across geographies have been improving their ESG disclosures over several years now. This has given birth to a number of third-party ESG data and ratings providers. This support industry is itself worth about a billion dollars, as per some estimates. India doesn't have a long history of ESG-focused regulations. There has been some oversight on business by government bodies such as the Ministry of Environment, Forest and Climate Change and the Ministry of Labour and Employment but it has been nowhere close to the attention given to the ESG theme worldwide. On the brighter side, through the Companies Act 2013, India became the first country in the world to make corporate social responsibility (CSR) mandatory for businesses with a certain turnover and profitability. Such businesses are required to spend 2 per cent of their average net profit of the past three years on CSR. More recently, in late 2020, SEBI introduced new norms for ESG disclosures by the top 1,000 listed entities by market capitalisation. These have to be complied with by FY22. Actually, the market regulator's ESG focus dates back to 2012, when the top 100 listed companies were m