♻ Why is India Getting An ESG Advisory Committee?
Measuring the impact that companies are making is a difficult task. Here's how a new ESG committee will help with this.
With each passing day and each degree increase in the temperature, the world is realising the need for sustainable and green initiatives.
Of course, the responsibility lies with us, but a major chunk of it must be shouldered by corporations across the world. Why?
Well, you will be surprised to know that just 100 companies are responsible for 71% of global emissions.
So, countries across the world have been taking some measure or the other to keep a check on these top polluters.
And India has now joined this list.
You see, the SEBI has formed an advisory committee for advising on ESG-related matters pertaining to the securities markets.
Confused? Then ReadOn!
♻ Understanding ESG
ESG is the current favourite jargon for businesses.
It stands for Environmental Social and Governance issues: which is a really broad set of issues including stuff like what a company’s carbon footprint is, how sustainable is the company, how it treats its workforce, and so on.
Why club all these varied issues together?
Because each aspect is important for the sustainability and the longevity of a company.
If a company is going carbon neutral but cutting its workers’ pay to do so, then it is not a company that will do well in the long run, right?
So, how a company fairs on all three grounds gives us an exact picture of how much value it is creating for the economy as a whole and how sustainable it is.
And as investors are getting more woke and climate and socio-economically conscious, they are looking at ESG metrics more than financial metrics to decide where to invest.
Don’t believe us? Let’s take a look at the numbers then.
And here is a list of all the funds in India that are focusing specifically on ESG metrics (you can read more about these funds here).
But why should one invest on the basis of ESG? How do you even get financial comfort while investing?
Over 2,000 studies have been conducted on the impact of ESG metrics on a company’s finances. Out of them 70% found a positive correlation between better ESG metrics and financial results.
Because taking preventive action is more cost-effective than taking corrective actions.
Basically, following ESG guidelines protects a company against several environmental and social risks and makes it sustainable in the long run. This reduces the costs it would have had to use to mitigate those risks.
For instance, having a good workforce policy prevents strikes which could cost the company.
Using sustainable packaging and less water further reduces costs.
Customers and workers are more likely to be loyal to companies that are eco-friendly and socially responsible.
All of this improves a company’s financial performance. Evidence suggests a good ESG score could reduce a company’s cost of capital by 10%.
The point is that ESG is huge among investors.
The problem? Measuring it.
Different analysts have different ways of measuring them.
For instance, here’s how three different rating providers rank Tesla in terms of ESG.
Even India’s ESG funds have exposure to carbon-intensive sectors and hold assets that don’t technically fall under the ESG sector. So, how do we understand where each company really stands in terms of these issues?
🚀 India’s Solution to ESG
Since we don’t really have a global benchmark for ESG, SEBI has made it mandatory for the country’s top 1,000 listed companies to file a Business Responsibility and Sustainability Report from FY22-23.
What will the report contain?
Broadly these metrics:
You can check out the detailed form here.
But these metrics need to be constantly revised and revisited.
That’s where SEBI’s advisory committee comes in.
It will keep reviewing more indicators that could add more value to the economy and should be made mandatory.
Also, you may have seen a lot of big companies focusing on going carbon neutral and plastic-free.
That’s because being environmentally friendly is “in” right now.
But a lot of these companies are ignoring social and governance issues.
So, the board will focus on creating broader and more uniform metrics to measure these issues as well, to make sure they aren’t forgotten.
Basically, the committee is here to make meaningful change and ensure that ESG does not become just another term that companies and fund managers use to dupe customers and investors.
⚡ In a line: All in all, India is working to ensure that our biggest companies aren’t just focused on making profits but are also focusing on bettering the country as a whole.
🍿 Food for thought: Though ESG is the talk of the town right now, some believe that it is impact investing that can make a difference. Let us know if you want to know more about what impact investing is.
💡 Quick question: Will the advisory board be able to make a difference? Tell us in the comments.
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Please explain impact investing