Add green edge to your portfolio

World Environment Day, celebrated on June 5, offers us a unique opportunity of having our cake and eating it too! More simply of having our profit as well as being environment-friendly.

“Socially conscious investors practice ESG (Environment, social, and governance) investing not only for moral or environmental reasons but also because they believe that rewarding these values will support a company’s long-term performance,” explains Abhay Laijawala, MD and fund manager, Avendus Capital Public Markets Alternate Strategies. Laijawala was referring to a new trend where investors look at how environmentally friendly or ‘green’ a company is in its policies before they invest in the company.

“Environmental, social and governance (ESG) based investing is meant for socially conscious investors; it is quite popul

World Environment Day celebrated on June 5 offers us a unique opportunity of having our cake and eating it too! More simply of having our profit as well as being environment-friendly.

“Socially conscious investors practice ESG (Environment, social, and governance) investing not only for moral or environmental reasons but also because they believe that rewarding these values will support a company's long-term performance,” explains Abhay Laijawala, MD and fund manager, Avendus Capital Public Markets Alternate Strategies. Laijawala was referring to a new trend where investors look at how environmentally friendly or 'green' a company is in its policies before they invest in the company.

“Environmental, social and governance (ESG) based investing is meant for socially conscious investors; it is quite popular globally and is now picking up in India too,” says Gaurav Dua, SVP, head – Capital Market Strategy and Investment, Sharekhan by BNP Paribas.

So how exactly is a green or ESG analysis done? And how does it go beyond the traditional number crunching of looking at a profit and loss statement?

An ESG analysis helps make a comprehensive analysis of a business or company transcending traditional financial analysis, which is largely based on the usual balance sheets. More importantly, ESG analysis helps provide additional information to help identify the quality, maturity, and resilience of the company's management and policies.

Do note that an ESG analysis is important to investors in their investment choices, besides acting as a salve to their conscience.

The ESG scrutiny acts as an 'early warning radar' for risks that are not yet reflected in asset values. “Many times, traditional reporting frameworks will not necessarily throw up these risks during an assessment but an ESG analysis may result in these risks coming up as red flags or conversely vale enhancers,” says Laijawala. By identifying these risks before they manifest in a controversy or event, ESG analysis helps identify areas of concern and avoid companies where such risks are high.

“An advantage of an ESG scrutiny or analysis is that it (the ESG analysis) filters out companies that might pose a financial risk due to environment or other corporate governance issues,” says Dua. Thus, an ESG compliant company will carry a relatively lower risk in an investment portfolio.

So how does the ordinary investor get such ESG information?

Sebi has mandated the inclusion of business responsibility reporting (BRR) for companies to report on their non-financial performance. The BRR's are part of annual reports of listed companies considering the larger interest of public disclosures from an ESG perspective. Investors can gain a perspective on company's ESG issues from an analysis of these BRR's.

“Traditionally, Indian companies have lagged many of their global corporate peers, in terms of adequate levels of ESG disclosures,” says Koel Ghosh, head of business, South Asia, S&P Dow Jones Indices, “but there is a growing awareness amongst Indian companies and investors on the importance of applying ESG factors in conducting business longer term.”

India is at a nascent stage where ESG or green investing is concerned, trailing behind the more advanced economies.

“Many fund managers in Indian for instance, have started showing interest in ESG products, as there is an increase in demand in such products from investors,” informs Ghosh. S&P offers three ESG focused indices – the S&P BSE Carbonex, the S&P BSE Greenex, and the S&P BSE 100 ESG Index.

Globally, S&P has some 22 billion dollars tracking their ESG Indices. When GPIF (Government Pension Equities Fund – a pension fund for Japanese employees invested some 10.6 billion dollars, the AUM (assets under management) of such ESG funds almost doubled.

According to the Global Sustainable Investment Alliance (GSIA), Sustainable investment has surged worldwide by more than a third since 2016, reaching assets of more than $30 trillion at the start of last year and expected top constitute almost 30% of total Assets under management.

A thorough analysis of the ESG factors would help in managing any risk that could compromise the long-term survival of the organisation or erode the value of its intangible assets and as a corollary, firm value. “Companies that focus on many of these intangibles (goodwill, brand, ethics, governance, etc.) foster a culture of excellence and a strong capital discipline which can lead to superior long-term performance,” ends Laijawala..