Investing for better: Understanding the ESG ecosystem
Investing for better: Understanding the ESG ecosystem
The ESG realm seems to be very ambiguous, but since investing is also for financial impact, there may need to be more data to support that companies who focus on specific values also do financially well
Let’s be clear, there is a difference between what is generally termed impact investing and values-based investing. Impact investing is about making funding available to companies who are trying to make the world a better place by tackling issues such as hunger, climate change, education for the underprivileged, healthcare and so on; values-based investing, however, is investing in companies that may not necessarily be trying to fix these issues but are creating an ecosystem of sustainability, diversity, and other such values in their regular business. And both these segments are growing.
A recent report by the US SIF Foundation estimates that 25 percent of $46 trillion that is managed professionally in the US is under socially responsible investment funds; a 38 percent increase over 2016. Al Gore, a former US Vice President has been a vocal supporter of sustainability and combating climate change. In 2004, he created Generation Investment Management along with David Blood (of Goldman Sachs), an impact fund headquartered in London. When people who have the voice and reach turn advocates, it gives impetus to the sustainability movement.
So, while impact investing has a definite agenda and is usually backed by high net worth individuals and funds with a minimum threshold, the values-based investing world is focused towards the retail investors via ETFs and mutual funds, and is tilted towards ESG (Environment, Social, Governance). And there lies a problem. Let’s look at the Indian ESG indices developed by MSCI and Nifty; the difference is quite glaring. Reliance Industries has had its run-ins with environmental activists, yet it has the highest weighting in Nifty’s index and no presence in the top ten of the MSCI. Morningstar India explicitly states that their sustainability indices do not necessarily exclude objectionable industries. In the end, a company with a great environmental record but poor diversity and representation could still find its way into these ETFs and funds. Which means that it’s all relative. So, isn’t there a common way in which ESG is decided? The answer is no.
The problem is that ESG has become more of a marketing gimmick and less about substance. There’s really no standard definition of the best practices and sustainability researchers could well have their biases creeping in. Analysts’ primary concern continues to be about quarterly guidance and less about sustainability and most institutional fund managers are still not concerned about the role they can play for change. The ESG realm seems to be very ambiguous but since investing is also for financial impact, there may need to be more data to support that companies who focus on specific values also do financially well. The message today seems to be that you can’t have your cake and eat it too.
Certain asset managers are raising their voices in an attempt at shareholder activism. Larry Fink, CEO of Blackrock, one of the world’s largest asset managers, wrote to company CEOs saying that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” From Milton Friedman (who said the sole objective of business is profit) to Larry Fink, the paradigm is shifting. And the Indian industry will get there too. In 2018, Kotak Mutual Fund became the first asset management company in India to sign the United Nations supported Principles for Responsible Investment with a commitment to following sustainable investment practices.
Avendus Capital, an alternate asset management company began what they call India’s first ESG fund in February of 2019. In the mutual fund space, SBI revamped their SBI Magnum Equity fund into the SBI Magnum Equity ESG Fund and it seems to be the only fund officially in that category. A group of ex-Tata Group executives along with the founder of Quantum Advisors is also planning to set up a fund that will work with management of smaller companies to help them improve governance. And while there isn’t a fund yet, Ambit Capital created an Index of Politically Connected Companies (IPC) in case you want to avoid companies with strong links to political parties with ideologies that you don’t share. However, with the ESG segment already doing some soul searching, for values-based investors would be barking up the wrong tree with more of the same thing.
But the interest is only growing as the data from Bloomberg shows. Millennials and women care more about causes and as change leaders and segments that will control a larger part of the wealth in the future, companies, asset managers and advisors need to understand that their vision of values-based investing is to do as much good as they can. The financial impact may be secondary and they just want to avoid supporting ‘les enfant terribles’ of the corporate world. The financial services industry, including asset managers and advisors, need to pull up their values-based socks up and realise that the movement will only get stronger and the already confused ESG basket isn’t going to cut it.
Remember, the future of our planet is in our hands. Are we ready to invest for better?
The author isCo-Founder of Investography, a financial wellness company based in Bengaluru.