Understanding the Basics of Sustainability. Is Time for a New Strategy?
The growing importance and inclusion of sustainability values among global investment themes has redefined investors’ views of sustainability factors in portfolio strategies. The idea that sustainability concepts are futuristic is dated—the future has definitely arrived.
The world is changing, and the percentage of retail and institutional investors applying environmental, social, and governance (ESG) principles is on the rise. More and more sustainability data providers are scaling their business to provide deeper qualitative and extensive information, as companies are prioritizing disclosure and reporting. Sustainable funds attracted USD 185.3 billion in net flows in the first quarter of 2021, which was up 17% from the previous quarter at USD 158.3 billion.1 While Europe led the ESG scoreboard followed by the U.S., Asia ex-Japan reported USD 7.8 billion, with 4% of total inflows and 237 funds. Many projections forecast a multifold growth in ESG solutions in investment products, so it might be time to take notice of this new wave.
India is slowly waking up to the growing reality of ESG relevance. While some have embraced this concept, skepticism rules in a market that has the leading country benchmark, the S&P BSE SENSEX, above 52,000 and a one-year annual return of 62%.2 The thought that ESG is just a novelty is still at large. Therefore, a deep dive into this fast-developing concept may be a worthwhile dialogue.
ESG investing is not about categorizing companies on the basis of how “good” they are but how they manage each of the ESG factors (environmental, social, and corporate governance), thereby helping investment strategies in their selection methodologies. S&P Dow Jones Indices has a wide gamut of indices tracking these factors. ESG indices based on core benchmarks, such as the S&P 500® ESG Index, S&P Europe 350® ESG Index, S&P 500 ESG Elite Index, and S&P BSE 100 ESG Index are just a few.
The increasing focus on sustainability inclusion is being reflected through the markets’ growing recognition of the financial materiality and impact of ESG issues on corporate balance sheets. Therefore, the range of ESG offerings has expanded to include climate change indices, carbon efficient,fossil fuel- free indices and thematic ones which include clean energy and water indices.
The 2016 Paris Climate Agreement resulted in many countries pledging to net zero goals. Net zero,also referred to as carbon neutrality, is the scenario wherein the carbon or greenhouse emissions are balanced by absorbing the same from the atmosphere. Since there are heavy industries such as chemical, steel and cement and some others that cannot achieve absolute zero targets, the goal is to create a ‘net zero’ target. The negative impact of global warming has been recognized worldwide, and action is being taken across industries. Regulators, product providers, and investors have also joined the cause by taking stock of the climate risks in their holdings and alignment to the scenario in which global warming increases by no more than 1.5°C.
Sustainable factors focus on addressing global issues, and investment strategies are incorporating them in a coordinated effort toward a positive change. The events of the past year have caused many businesses to consider ESG risks and opportunities and the role they play in achieving financial resilience, thereby fueling ESG adoption within the investment community.
In India, companies like Reliance Industries, HDFC Bank, Tata Consultancy, Infosys are pledging their commitment toward net zero along with several other global companies across the globe. The country’s efforts to align with the global focus on climate change is a tall task involving reduction in coal which is the primary source of energy and power generation. However, efforts are in progress with initiatives such as the world’s largest solar energy project to generate 175 gigawatts of renewable energy capacity by 2022 and 450 GW by 2030, tackle deforestation, regulatory disclosure requirements by top companies for ESG disclosure being introduced along with the governments focus via varied projects. Even though these are small steps, they are aimed towards the ‘net zero’ target.