The concept of socially conscious investing started getting advocated about three decades ago but even five years back the asset management community was debating whether ESG investments are a new marketing gimmick or a phenomenon that is slated for growth.
Circa 2021, ESG investments were stable, bigger, and growing at such a pace that Reuters declared 2021 as the Year of ESG investing.
ESG investing is getting reckoned as the Third Wave of Asset Management. The first wave started when Benjamin Graham’s concept of Value Investing started gaining interest and traction amongst the investment community. Modern Portfolio Theory, propounded by Harry Markowitz, is considered to have launched the second wave of asset management. Both these concepts are followed by fund managers and asset management companies, globally. Now, ESG investing is gaining the same kind of respect and traction, making it a force to reckon with.
According to data from Refinitiv Lipper, at the end of March 2022, 10% of assets invested in funds worldwide are in ESG funds. Investors poured a record $649 billion into ESG funds around the globe during the first 11 months of 2021, up from the $542 billion invested in such funds in 2020 and $285 billion in 2019.
ESG Funds track companies’ environment, social and governance behaviour before investing into them. Companies vying to raise money through IPOs are also making it a point to showcase ESG compliance during investors’ presentation and road shows.
Fortune India has learnt that Fabindia that sells ethnic products handmade by craftspeople from rural India had engaged Ernst and Young for its ESG audit. Fabindia is planning to launch its IPO soon where the company will position itself as an ESG-compliant IPO. ESG compliance is one of its major selling points to future investors and Fabindia may become the first Indian IPO to be totally ESG compliant, voluntarily, even before going public.
This is an opportune time for more IPOs like Fabindia as there is a growing demand for companies that can qualify for ESG Funds, especially of that of Foreign Institutional Investors (FIIs).
ESG compliances involve fulfilling the environmental, social and governance goals set-up by the government. As per a June 2021 circular by SEBI, it became mandatory for the top 1,000 listed companies in India (by market capitalisation) to file Business Responsibility and Sustainability Report (BRSR) from FY 23. The BRSR report highlights ESG compliance for the top 1,000 listed companies. For other public listed entities and private players, ESG compliance is totally voluntary.
However, even without any ESG mandate, Fabindia was pursuing exemplary ESG practices as social welfare of indigenous artisans and farmers. Environment friendly products and production processes are the core values that the company seems to be founded upon. This is why it is the first of its kind IPO where an already ESG compliant private player is launching its IPO.
EGS Compliance: why it should matter to listed companies?
Amy Domini, the founder and chair of Domini Impact Investments says that the big question that is now being asked is – What impact are your investments having?
Domini is considered to be one of the most powerful global voices for socially responsible investing. Domini featured in Time magazine as one of the Time 100 list of the world’s most influential people, in 2005.
Asset Management Funds in Europe and America already have dedicated fund managers to invest in companies that are actively pursuing ESG goals and focus on sustainable development. ESG Investing or Sustainable Investing has grown in the European and American markets to the extent that now there are mandatory disclosures and regulations in place to curb investment activities akin to Greenwashing in ESG initiatives. Greenwashing is a term used to define efforts and initiatives that are done in the name of environmental protection but only for the sake of appearances. Greenwashing is usually done by companies whose business damages the environment but who cover up that damage by marketing-promotions of some minor effort to create a perception that the company is environment conscious.
This means that Foreign Institutional Investors (FIIs) investing in ESG Funds will be drilling deeper into the activities of companies before investing. In India, except for the companies who are mandated to comply with the ESG goals defined by the government, there will be rare entities like Fabindia who would fit the bill for Foreign Institutional Investors’ ESG Funds.
In fact, the growing Asset Under Management (AUM) of ESG funds is an opportunity for every listed company that is keen on making a social impact.