Over the last few years, the world of investing has witnessed several shifts in the values that govern investments. One such example of a strong undercurrent of change that is taking place in the investment arena is the rise in popularity of ESG investing. In the realm of ESG investments, only those companies and businesses are chosen for investments that fulfill certain attributes in terms of the environmental, social and corporate governance policies that they follow for generating risk-adjusted returns in the long run.

If you are yet to familiarize yourself with the gamut of ESG investing, here are five things that you should know about:

• At the core of ESG investing is the notion that coercion from investors especially, the major players can coerce large corporations to follow responsible practices from a social, environmental and governance perspective. Considering the burgeoning threats posed by climate change and the destruction in natural ecosystems, degradation in flora and fauna and the impacts on human lives, corporations can no longer continue to ignore the detrimental impacts of their business activities. The ‘E’ in ESG investing stands for the principle of investing in companies that are actively trying to make a shift to environmental-friendly practices.
• The next criterion that is at the core of ESG investments revolves around the values and ethos that the company abides by in its dealings with various stakeholders in the business ecosystem. This includes employees, contractors, customers, suppliers and corporate social responsibility actions also fall under this ambit. Companies that adhere to socially responsible policies, have clean management practices and are committed to the well-being of their human capital assets within and outside the organization make the cut.
• This governance criterion seeks to judge companies by evaluating their management frameworks and business ethics and their potential to manage long-term risks and opportunities. Before scoring a company on the corporate governance scale, questions such as - does the company maintain transparency in its accounting methods, is there a regulatory framework to hinder corruption or any kind of illegal practices – are taken into consideration. Investing in companies that have good corporate governance practices can go a long way in generating value as the chances of such companies running into troubles due to malpractices would be slim and your investments would be safe.
• Many investors have refrained from jumping on to the ESG bandwagon because of the perception that ESG investments may not deliver great returns and they may have to compromise on profits. But this is slowly emerging as a myth - study published in 2015 by the University of Oxford and Arabesque Arabesque Partners titled “From the Stockholder to the Stakeholder” summarized approximately 200 scientific sources on the economic effects of sustainability and found that good ESG performance is linked to better stock performance.
• Previously there were no uniform standards for assessing ESG investing and fund houses drafted their own formulas for filtering ESG stocks from non ESG ones. However, taking cognizance of the trend of more investors gravitating towards ESG funds in India, in May 10, 2021, the Securities and Exchange Board of India (SEBI) issued a circular notifying new disclosure norms on sustainability related reporting for the top 1,000 listed companies by market cap by FY23. The reporting will now be under a new business responsibility and sustainability report (BRSR) format, the SEBI circular said.

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