Can ESG Funds Help Make the World a Better Place?

Photograph by Menty Jamir

As capital markets have grown, so has the concern surrounding the impact of capitalism on the environment and human rights. This is especially true for younger generations. Concerns over the environmental impact of companies have converged with discourse around the impact they have on society as a whole, as well as their internal functioning — working environment, corporate diversity, etc.—creating a scenario where many shareholders now demand transparency from companies on how they fare in these fields.

A 2021 study published in The Lancet journal found that 84% of 10,000 young people, between the ages of 16 and 25 surveyed across 10 countries, were at least moderately worried about climate change. In 2020, a survey of 2,000 adults in the UK by Triodos Bank found that the pandemic motivated one in five respondents to explore ethical funds. 49% of the total respondents wanted their investment provider to align with the UN’s Sustainable Development Goals. Remarkably, within the 18–34 age group, this number rose to 58%. In the US, a CNBC poll of 1,000 people aged 33–40 revealed: “About one-third of millennials often or exclusively use investments that take ESG factors into account, compared with 19% of Gen Z, 16% of Gen X and 2% of baby boomers.” Clearly, the young are considering factors other than profit alone when making investment choices.

A term that’s gaining steam in the business and investing space is ESG — Environmental, Social, and Governance. ESG investing typically refers to a set of criteria and standards by which environmentally and socially conscious investors identify companies that align with their values to invest in. There are several ESG reporting frameworks across the world that set out what details — in terms of environmental impact, social impact, and internal governance — companies should disclose, and how often. Analysts at ESG rating agencies — which could be government agencies, finance or investment firms, consulting groups, etc. — evaluate a company’s performance against these criteria, may interview the management, and examine information in the public domain to assign ESG scores. These ratings are useful to financial analysts, investors, or company employees.

 

‘While there are concerns around greenwashing and accurate performance assessment, the world of ESG investing offers an appealing array of investment opportunities for those who fear the consequences of funding the overutilisation of resources — including people — with their investments.’

 

There is no standardised universal ESG framework or criteria in place for analysts or companies to collectively adhere to as yet, which makes the ESG investing space tricky to navigate, with conflicting perspectives from rating bodies. That said, ESG still plays a huge role in modern capital markets.

In the global context, ESG investing has risen in popularity as more and more investors, both institutional and retail, have become keen to support companies that do their part to protect the environment, have a positive impact on society and align with their values. The PwC Asset and Wealth Management Survey 2022 states that “ESG-oriented funds are set to grow much faster than the market as a whole… and, as headwinds persist, are rapidly becoming one of the go-to assets for differentiation.” It also found that around eight in ten institutional investors surveyed planned to increase ESG allocations in the following two years, and roughly nine in ten had rejected or cut off an asset manager, or would consider it, owing to lacking ESG investment strategies. An article published by Deloitte in April 2022 predicted: “At their current growth rate, ESG-mandated assets are on track to represent half of all professionally managed assets globally by 2024.” A report by Morningstar puts the amount of money invested in global sustainable fund assets by the end of the first quarter of 2023 at $2.74 trillion — a 7.5% growth from three months prior.

In India at present, there are reportedly 12 ESG mutual fund schemes that one can invest in. The ESG landscape in the Indian financial market is still in its nascent stages. Nonetheless, the need to promote responsible investing seems to be clear, with SEBI enacting several measures this year to boost ESG-based investing and promote transparency — most notably, proposing that asset management companies be allowed to launch more than one ESG fund.

ESG-focused investments are predicted to grow to significant proportions in the next few years, with trillions of dollars in prospective green and ethical investment potential envisioned.