In the last two years, ESG assets under management in India have surged fourfold to Rs11,800 crore. Although it is a great mission, carrying it out is difficult.
Environmental, social, and governance investing (ESG), is one version or offshoot of socially responsible investing (SRI). ESG is a framework for evaluating a company's environmental, social, and governance policies and risks, and then analysing the company’s value based on that review. The concept is that just because a risk exists does not indicate that investors should forgo investing in the company entirely.
The value placed on ESG investing has grown over time, with ESG assets under management expected to reach $53 trillion by 2025, accounting for more than a third of total global assets under management. In India, ESG AUM has increased fourfold in two years to Rs11,800 crore.
While there is no doubt that ESG investing is vital, putting it into practise may be difficult and can result in unfavourable problems and outcomes.
The first issue is the lack of standards that define ESG compliance and allow investors to compare ESG performance. As more investors embrace ESG investment, it is hoped that uniform disclosures and monitoring would emerge.
The ‘G’ in ESG, governance, is the most straightforward part. A shareholder is obviously concerned about matters like the Board of Directors composition, the audit committee’s structure, CEO remuneration levels, and other aspects of governance that affect minority shareholders interests.
The problem appears to begin with, resolving the inherent contradiction between the letter’s ‘E’ and ‘S’.
Consider a coal-fired power plant that requires funding to expand. An ESG fund is unlikely to invest in such a project, and this decision will be determined according to the ESG acronym’s ’E’ element. Will it be a responsible decision to reject money to a project that will help reduce power outages and load shedding in a country where the average family loses power for 4-6 hours every day? Obviously, depriving a significant segment of the population of energy is not socially responsible. How does a fund manager strike a balance between these two opposing goals?
The difficulties do not diminish the importance of ESG investing. Any environmental damage has long-term social consequences in terms of health and safety for us and future generations. As a result, a solid governance system that balances firms social and environmental duties is necessary.