Investing is no longer about only the financial returns. A large number of socially motivated investors do want their money to fund companies that are committed to creating a better world through a more #sustainable business. In this way they want to encourage companies to act responsibly in addition to delivering financial returns.
As companies and #investors continue to increasingly prioritize investment decision-making that not only benefits the shareholders, but also other stakeholders like employees, creditors, government, consumers, society, environment and so on, new-age investment approaches are gaining popularity. This article deals with three such new concepts: ESG investing, SRI and Impact Investment. These sustainable investing approaches are gradually gaining popularity, yet these are often mistaken as one and the same thing. This article explains the differences in each approach.
Environmental, Social and Governance (ESG)
ESG, a new buzzword in the country, was first popularized in 2005. It refers to a broad range of environmental, social and governance criteria on which the performances of companies are measured. #ESG focuses on the company's environmental, social and governance practices of a company that have been rather neglected in the traditional system of financial reporting. Here’s a list of the various aspects that #ESGReporting focuses on: Environmental - Energy consumption, clean energy, pollution, climate change, waste production and treatment, natural resource preservation, animal welfare and so on; Social - Human rights, community engagement, child or forced labour, health, safety and welfare, employee relations and so on; #Governance - quality of management, Board diversity and independence, conflicts of interest, transparency, disclosure and timely compliance, shareholder rights and stakeholder relations.
In India some form of basic ESG reporting was introduced for the first time in 2009 when the Voluntary Guidelines on Corporate Social Responsibility was issued by #MCA. This was later replaced it with a more comprehensive set of guidelines called the National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business (NVGs) issued by the MCA in 2011. In 2012 SEBI mandated the Business Responsibility Reporting (BRR) as part of their annual report for the top 100 listed entities by market capitalisation. This has now evolved to the Business Responsibility and Sustainability Report (BRSR). Starting from FY 2022-23 Indian organisations are expected to voluntarily disclose their Environmental, Social and Governance (ESG) performance. Under SEBI’s BRSR mandate of #BRSR, ESG reporting will be mandatory for the top 1000 listed companies based on market capitalisation from FY 2023-24.
ESG vs. SRI vs. Impact Investment
The terms (and approaches to investment) Environmental, social and governance (ESG) Investing, socially responsible investing (SRI) and impact investing are often used interchangeably by not only industry people, but also by professionals as they think the three describe the same approach. The subtle differences are explained hereunder. In the following paragraphs we will discuss the various types of new-age investing approaches that aim at increasing levels of benefit for the society and environment.
Driven by the greater concept of ESG, ESG investing is an evolution of the trend toward socially responsible investing. ESG investing is getting popular with investors who are concerned about companies adopting practices that will mitigate risk and ensure their long-term sustainability. ESG-focused investment gives priority to factors like accounting for climate and environmental risks [the ‘E’ aspects], investments in physical and human capital [the ‘S’ aspects] and better governance [the ‘G’ aspects]. This has prompted companies to do business with #ESGcompliances in mind. Socially Responsible Investing (SRI) Socially responsible investing is often also called Sustainable investing. #SRI goes a step further than ESG by including or discarding investments based on considerations of ethics and morality. Socially responsible investing allows investors to screen companies based on whether or not they are engaging in sustainable practices to make their investment decisions. Socially responsible investors might avoid companies doing business in products like weapons, drugs, alcohol, tobacco and other addictive substances, fast food, fossil fuel or those engaged in gambling or those that employ child labour, violate human rights and labour laws, or cause pollution or environmental damage. Under SRI an investor will be motivated to invest in companies that spend a large portion of their profits on charitable avenues. Impact Investing As compared with ESG and SRI, another type of investing that is getting popular and has also been encouraged by the 2019-20 Finance Budget of the country. #ImpactInvesting, also called thematic investing, is a type of investing that generates positive outcome in the form of a tangible social good. It aims at helping socially responsible businesses to achieve their goals that are directed towards benefiting the society or environment. Examples of impact investment would be fund an NGO that is carrying on R&D in drinking water in water scarce areas, or clean energy in polluted regions or those aiming to solve the problem of air pollution in Delhi and so on. ESG vs. SRI vs. Impact Investment from Investor’s standpoint From the point of view of investing, ESG and SRI are often used interchangeably. In reality the two are quite different and ESG investing is a competitive alternative to sustainable investing. Impact Investment is one step ahead. While ESG is all about making investment portfolio looking ‘less bad’, SRI is about choosing to invest in companies that are making a positive contribution in the world, and Impact Investment is about steering positive changes in the society in areas that lack attention. In #ESGinvesting investors base their investment decisions on the extent to which environmental, social and governance risks and opportunities can materially impact a company’s performance. Such investors manage to have a balance between investing sustainably and getting the same financial returns as they would with a traditional investing approach. SRI on the other hand focuses on companies that make a positive social change. While the financial return of companies is given the secondary importance, the ethical and moral value of the companies is given the primary importance in SRI decisions. Impact investing seeks to help socially responsible businesses to achieve their goals which aim at social or environmental benefit. Bottom line
Sustainable investing approaches like ESG investing, SRI and Impact investing are gradually gaining popularity among investors. Study shows that the popularity of socially motivated and ethical investment is especially high among millennials. This shows the utmost importance for companies to incorporate ESG performances parameters in their businesses to start with. The move of #SEBI to introduce Business Responsibility and Sustainability Reporting (BRSR) for Indian listed entities on a voluntary basis from FY 2022-23 and mandatory reporting on Environmental, Social and Governance (ESG) performance for the top 1000 listed companies from FY 2023-24 is a step in the right direction and in time.