ESG :A promise beyond profits

Hellooo.... Happy Diwali all!

When Diwali is around the corner, isn't this the right time to celebrate, light up lamps, draw rangolis, share joy and make valuable investments? And what about bursting crackers? How is that even possible when the Air Quality Index (AQI) in New Delhi has been buzzing around for the past few weeks and is a worrying concern? It's high time we change our conventional thoughts and take care of our future generations. So, why don't we shift our investment priorities this time? Let us take a closer look into data that would convince us to redefine investor responsibilities.

As per the studies conducted by www.aqi.in, the Air Quality Index of major Indian cities in the last 3 years during Diwali has been terrible. The below chart represents the particulate matter (PM) in air, in simple words, various elements of dust particles that deteriorate the quality of air.

As Diwali celebrations have already begun, here when we witness the intersection of tradition and the harsh reality of environmental consequences, it becomes increasingly imperative to delve into the realm of responsible investing.

In the current economic landscape around the globe, the unemployment rate being one of the most pressing concerns, the International Labour Organisation projected an unemployment rate of 5.3% for the year 2023. The US non-farm payroll data released last week also agrees with it wherein the unemployment rate increased to 3.9% in the US during October month. As far as India is concerned, the unemployment rate touched its highest in October month to 10.1% (CMIE) against the 5.9% average in the last 10 years.

The correlation between worsening air quality exacerbated by seasonal events like Diwali, increasing unemployment rates and unethical business practices around the globe, I felt this is the right time to discuss the urgent need for environmentally and socially integrated sustainable practices and explore the significance of ESG investing and ESG reporting.

ESG framework stands for Environmental, Social and Governance. ESG Reporting and ESG Investing are different, but branches of the same tree. By providing transparent and comprehensive data on a company's performance in environmental stewardship, social responsibility, and governance practices, ESG reporting empowers investors with the information needed to make informed decisions aligned with their values. As of now, more than 25 countries have opted for mandatory ESG reporting. There are various frameworks in the world like UNGC, GRI, SASB, etc... formulated different reporting standards.

The Indian scenario is pretty much similar where SEBI has proposed and mandated BRSR - Business Responsibility and Sustainability Reporting disclosures for top 1000 listed companies (including subsidiaries, parent companies and joint ventures) by market capitalization (Market capitalization is the number of shares issued* market price per share as of date) as an introductory measure for ESG disclosures in the country. The applicability of the said companies is in the following timelines:

1. FY 2023-24: Top 250 listed entities

2. FY 2024-25: Top 500 listed entities

3. FY 2025-26: Top 1000 listed entities.

BRSR Core focuses on the following 9 ESG dimensions:

• Greenhouse gas emission footprint

• Water footprint

• Energy footprint

• Embracing circularity - Waste management

• Employee well-being and safety

• Enabling gender diversity

• Inclusive development

• Fairness in engaging with customers and suppliers

• Openness of business

When there were no prescribed standards and/or guidelines regarding previous CSR spending of various companies, ESG reporting is the beginning of a radical change for our successors. This enhances transparency and will definitely help investors to evaluate beyond financial metrics and make informed decisions. ESG investing will allow investors to consciously choose sustainable investment options for crafting a better tomorrow.

However, there are a few challenges that come along with this system. Lack of awareness is one of the main among them. More investors are yet to explore the horizons of ESG investing. Investors only have a handful of choices as there are only a few ESG oriented funds at present in India and may not give the best CAGR (Compound Annual Growth Rate) when compared to other outperforming funds. Also in case of ESG mutual funds, the assets under management (AUM) is witnessing significant net outflows in the year. Companies may engage in "greenwashing", where they mislead and exaggerate as environment friendly when they actually are not to attract eco-conscious customers to invest.

In envisioning the future of ESG reporting and investing, we find ourselves making conscious choices that shape not only the economy but also the world we leave for future generations. As ESG reporting continues to evolve, it becomes a catalyst for transparent, ethical, and sustainable business practices. ESG investing emerges as a powerful vehicle for aligning financial goals with personal values, empowering investors to contribute to a positive change.

As we embark on this journey, let us not only celebrate conscious Diwalis, making mindful choices in our investments but also carry the joy of knowing that, through ESG investing, we are actively participating in the creation of a better, more harmonious future for generations to come. In each investment decision lies the potential to illuminate a path towards a brighter, more sustainable tomorrow. Stay joyful, stay conscious, and let the spirit of responsible investing guide us towards a prosperous and compassionate future.