ESG Investing: Explained & Simplified

If you’ve started to become environmental friendly and value certain ethics and principles, then you’d want your investments to follow the same values as well. That’s where ESG investing comes in.

What is ESG Investing?

ESG investing means investing in companies that contribute to better people, planet & profits, without sacrificing investment returns. ESG factors may include non-financial parameters that does have a material impact on a company’s long-term financial health.

ESG encourages companies to look beyond traditional parameters and measure sustainability. Companies are evaluated on quantitative and qualitative parameters. ESG factors cover a wide spectrum of aspects that may not be part of financial analysis, yet may have financial relevance. This might include how corporations respond to issues such as climate change, water management, health and safety policies, supply chain management, treatment of minority workers and whether they imbibe a culture of innovation & trust.

Let’s understand thefull form of ESG funds

E – indicates a company’s exposure to environmental issues such as energy conservation, pollution control, climate change, carbon neutrality, treatment of animals, water management, etc.

S – Social, includes companies’ ability to attract and retain skilled manpower at a socially responsible manner incorporating an inclusive workforce irrespective of gender, race or color. Other socially responsible initiatives could include providing the locals with access to education and medical facilities and avoiding product liability issues.

G- indicates a well-run company with strong governance, how does it interact with shareholders, how does the management drive leadership and bring effective adherence to policies and procedures, while fostering integrity, honesty and transparency at all levels.

Why should you make an investment in ESG? Investors can grow their corpus by investing in companies that take care of environmental, social and governance factors:

Companies who care about such values resonate with consumers and investors,
have lower costs and improved operational performance,
create sustainable value and
Enjoy corporate longevity.
For companies that do not incorporate ESG parameters they:

End up losing their customer base,
Fail to attract/retain good talent,
Run the risk of facing litigation and regulatory actions etc.
Therefore, ESG investing reduces your exposure to risk and contributes to growth over the long term.

ESG Investing is Responsible Investing You experience a sense of personal satisfaction when you choose to buy organic vegetables from the local vendor as compared to buying vegetables that look nearly half as fresh from a supermarket. Similarly, when you invest in companies that are sensitive to ESG parameters, you feel empowered to invest in companies that reflect the fundamentals that you believe in.

In coming times, corporate India will have to follow stipulated norms and regulations or provide extensive disclosures on adherence to responsible business practices.

ESG criteria broadens the ecosystem of how participants interact with each other. For instance, on the social side, it identifies companies that have built a sustainable relationship with employees, suppliers, communities and investors at large; and have built a strong reputation with the potential to generate more business. A significant proportion of a company’s valuation is tied to intangible environmental and social and governance parameters that material impact on its financial outcome.

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