ESG investing in India

Abstract

ESG (Environment, Social and Governance) Investing has its roots in Socially Responsible Investing (SRI), where the core principle is to invest money in companies which engages socially and environmentally responsible practices. Although this theme has gained prominence in the last 10 years, it goes back to more than 200 years ago to the Methodist Movement where people protested against companies that made weapons, tobacco, etc. In 1971 Pax World launched the first sustainable mutual fund in the US. It was run by two United Methodist ministers, Luther Tyson and Jack Corbett, who wanted to avoid putting church dollars in companies that contributed to the Vietnam War. They wanted to align their investments with their values and urge companies to adhere to a standard of social and environmental responsibility. Interestingly, this mutual fund is active even today. In 2000, Kofi Annan, Secretary General of the United Nations launched the Global Compact initiative. Annan wrote to over 50 CEOs of major financial institutions, inviting them to find ways to integrate sustainability into capital markets. This was a voluntary, corporate-citizenship effort based on a set of human rights, labour, environmental, and anticorruption principles. In 2004, the Global Compact published a landmark study titled “Who Cares Wins” where the term ESG was used for the very first time. The report stated that embedding environmental, social and governance factors in capital markets makes good business sense and leads to more sustainable markets and better outcomes for societies. At the same time UNEP published the “Freshfield Report” showing that ESG issues were relevant for financial valuation. These two reports formed the backbone for the launch of the Principles for Responsible Investment (PRI) at the New York Stock Exchange in 2006 and the launch of the Sustainable Stock Exchange Initiative (SSEI) in 2007. ESG investing accelerated around 2013 and 2014 when the first studies were published showing that good corporate sustainability practices are associated with good financial results. In 2020, Assets Under Management (AUM) of ESG funds stood at $40.5 trillion. Although it originated in Europe, ESG has spread its wings in USA, Japan, Canada and Australia. India too is catching up on this trend. Fund managers are incorporating ESG practices into their investment decisions and some fund houses have launched dedicated ESG funds. The objective of our CCS project is to understand the trends in ESG investing and examine the position of India in this landscape with respect to its global counterparts. We also look at the strategies employed under ESG investing and critically examine the performance of ESG mutual funds in India. Finally, we look into the role of the ESG ratings.