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ESG And Stock Markets Are Synomyous

A company with a higher ESG score is also a better potential investment because it enhances managed portfolio performance, lowers portfolio risk, and boosts returns

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There’s heightened awareness around responsible living and sustainability in business. Many product labels these days clearly indicate what products or raw materials have been sustainably sourced, and if they are safe and vegan. “Companies in the stock markets also make available their CDP Climate Scores. ESG has become an integral focus of corporations today and ESG ratings indicate an organization's long-term commitment to environmentally favorable decisions, more eco-friendly operations, and reducing the impact on biodiversity,” says Chief Business Officer, Acer India, Sudhir Goel. The ESG ratings also assist people in determining whether there are any financial risks to the company. A company with a higher ESG score is also a better potential investment because it enhances managed portfolio performance, lowers portfolio risk, and boosts returns.

Companies polluting or exploiting the environment are not spared by investors and media alike. Gone are the days when factories releasing industrial effluents could slide by from the public eye. "Forward-thinking organizations know ESG impacts their overall risk profile. Hence investing in companies that actively work to address ESG risks is likely to be a better investment as they will witness fewer business disruptions, will be more trusted and produce more reliable financial results over time. That means lower downside risk for shareholders." says Shruti Jain, Chief Strategic Officer, and Sustainability Influencer, Arihant Capital Markets. It is not just for investors and stocks, but companies also will reap benefits from this practice. ESG-compliant companies will also reduce companies' risks and exposure to the downside. The market is realising ESG is an important factor, which is in fact becoming more important that growth number.

Jain also said, “ESG investing emphasizes environmental, social and corporate governance factors in addition to risk and return. While the ESG investment strategy has almost become mainstream in the US and Europe, the concept is relatively new in India but is gaining traction. With rising awareness about climate change and concerns about social injustice at workplaces, people are demanding businesses to be more transparent in their practices.” A key challenge is however remains, which is to measure the return on ESG. However, a good way to maneuver it is to use the Dow Jones Sustainability index as a parameter where 12 companies are listed. Additionally, we also need shareholder and stakeholder discipline. Concentrated ownership of the company, as is common internationally, shifts the source of governance problems to conflicts of interest between minority and controlling shareholders. This problem amplifies when the controlling shareholder exercises control through opaque structures, such as cross-shareholdings and stock pyramids. The companies also have to emphasise broad stakeholder interest, in line with shareholder interest. 

Weak institutions and people allowed to escape with public money add to lower ESG scores of a country and all its domestic companies. This will decrease minor stakeholders’ confidence. The solution is to come up with stronger laws. Another pivotal issue is deciding what constitutes ESG and what are its objectives. Such a perspective could align with that of professional investment managers acting as fiduciaries, whose objective is to find investment value in ESG.

Why is it a good idea?

Given the kind of importance, ESG is witnessing, companies have to become compliant if they want people to invest in the long-term and maintain a long-term business. For investors, ESG stocks are a good option if they want to leave a series of legacy investments, cause it is here to stay. Investing in companies that are high in profit and low in ESG ratings will dwindle in the future. 

Tags assigned to this article:
ESG initiatives stock market sustainability