3 reasons why it is a good time to invest in the ESG theme

As we come to the closure of 2020, a year that has been a pivotal one in so many ways, it is a good time to explore avenues for wealth creation that also align with the greater good of the world we live in and our values. We are already seeing some credible shifts. Through a survey that we conducted, majority of the 1600 plus respondents said their attitude towards ESG in their investment decision making process had changed post Covid -19. With this shift in mindset at play, it is a good time to incorporate the ESG way of investing in one’s financial journey.

Let’s look at three reasons why it is a good time to invest in the ESG theme.

ESG today is a global phenomenon

Given the manner in which the world is moving towards sustainable investing, ESG considerations are no longer just another niche option, rather it is becoming an essential part of the investing process. Europe represents almost half of the current $30.7 trillion of assets in sustainability funds, according to the Global Sustainable Investment Alliance. Increasing and stringent regulations related to ESG factors, millennials rooting for investment with a cause, protecting the environment, and growing awareness around the potential of ESG are some factors that have led to an upsurge of investor interest.

For businesses, the focus on integrating ESG to improve business sustainability is increasing as non-compliant companies are getting punished by all stakeholders. Reports also suggest that ESG metrics have shown to be better at forecasting a business’s future earnings potential instead of traditional measures. They also help companies to safeguard themselves from ESG related crisis that can result in regulatory or reputational disasters.

Flows into ESG focused sectors/companies are consistently increasing. ESG compliant companies tend to enjoy improved efficiency, better business numbers, as well as reduced cost of capital. This groundswell of interest is also resulting in the emergence of ESG focused business opportunities like renewable energy technologies, electric vehicles, clean tech etc. With these changing dynamics, one can expect ESG investing to become a core part of every portfolio going forward.

ESG can optimize financial returns

Focusing on ESG doesn’t mean one has to sacrifice financial returns – instead, it can generate gains for both individual investors and the society overall. Though past performance is no guarantee of future results, but historically ESG investing has rewarded investors over the long term and generated higher risk adjusted returns. In 7 out of 9 instances, Nifty 100 ESG TRI outperformed Nifty 100 TRI. More importantly, there is a certain consistency of returns.

ESG helps to avoid downside risks

In addition to the fact that historically ESG compliant companies have generated better returns experience, investments in such companies can also help limit exposure to downside risks, such as a company’s hidden liabilities or issues that can lead to controversies and value erosion. While investments in responsible companies do not entirely eliminate downside risk, they significantly reduce it, as non-compliance to ESG practices increase business risks. The ESG framework helps to avoid risky companies, identify sustainable companies, and improve return prospects. From a possible class action suit against gender discrimination, to a whistleblower complaint regarding malpractices, companies that adhere to the highest standards of ESG parameters are likely to protect themselves from such risks.