Question

Environmental, Social, and Corporate Governance (ESG)

• What is sustainable investing?
• Do you think investors should be concerned with ESG?
• Do you think ESG investments can perform better than non-ESG investments? Why or why not?
• What type of socially responsible fund would you invest in? Why?

Answer 1

Q1: What is sustainable investing?

Sustainable investing is when you add the ESG factors/parameters/performance measures into your investment philosophy. Typical investment philosophy would include the pure financial performance measures based on income statement, balance sheet and cash flow statement. Based on the measures the typical investment rationale might be into high growth stocks/sectors, low growth but high dividend paying stocks, different industry (like technology, utility).Sustainable investing dictates that we include the environmental, social, and governance (ESG) factors into it and score companies/sectors/countries on such parameters(how they perform on such parameters) before investing in these.

Q2: Do you think investors should be concerned with ESG?

Yes I think investors should be concerned with ESG. The reasons include:

1. Long term benefit: If companies include ESG factors in their management philosophy and future guidance and invest resources in improving ESG factors, in the long run they will benefitted from better operational efficiency, brand values which will ultimately give more returns and create wealth for the investors.
2. Regulatory effect: if companies are not careful about working on the ESG scores now, in near future regulatory bodies will eventually impose restrictions, impose restrictions on improving ESG practices, these will impact suddenly and heavily on the non-compliant companies and will incur more cost for the companies and will ultimately harm the investors. On the other hand, companies which invest now in improving ESG factors will be in much better position to handle the regulatory requirement and they might even set the standards for those regulation.
3. Public perception-Image: With information spreading globally and quickly, any bad reputation on ESG factors on any part of the globe will lead to bad image for the company on Public eye. This will erode brand value, low consumer confidence in companies’ products which will impact ultimately the bottom line for the companies and hence investors’ return will be hampered.

Q3: Do you think ESG investments can perform better than non-ESG investments? Why or why not?

I think ESG investments will definitely perform better than non-ESG investments in the long term, will perform almost equally in the medium term. But In the short term, as the ESG compliant companies need to invest some capital in ESG factors, there might be initial cash outflows, write offs which will impact near future financial ratios and impacting the returns accordingly. In the long/medium term the capital invested in ESG factors will increase the operational efficiency, brand values, regulatory compliance and thus the ESG investments will do better than Non-ESG investments.

Q4: What type of socially responsible fund would you invest in? Why?

I would invest in socially responsible mutual funds which dictates both the positive and negative screening in their investment rationale:

1. Positive screening: Invest in mutual funds which invest in big technological companies with good ESG scores, sustainable power companies (solar, wind,energy efficiency) and micro finance companies. The reason being all these companies are capable of having exponential growth in the long term.
2. Negative screening: Invest in funds which are not investing into weapons, Oil, Tobacco companies. Apart from the social angle of these companies, these companies will be low growth companies. With public perception changing gradually against these type of companies, they face the regulatory risk.