What is ESG? and How it is important for Indian Economy?

What is ESG?

In simple terms, E-environmental, S-Social and G-Governance is a branch of investing analysis just like Fundamental or technical analysis, with the only difference that ESG investing is a non-financial analysis. Diving into more deep in the analysis, we can say that it involves a company being ranked, scored or judged on basis of some metric or activity. For eg, if Company A manufactures electric vehicles and another Company B manufactures diesel vehicles, then we can say that on transportation activities Company A is more likely to be profitable in the long run than Company B. Now this is rather simpler if you are looking at just one indicator but just like this one there are hundreds and thousands of different activities under ESG. Also other than Environmental, there is also Social which takes into account of how a company is contributing to the society, to its employees or suppliers, or its surrounding and there is Governance which looks into how company runs its day to day tasks, uses transparent accounting methods.

Who decides what activities comes under a particular metric?

To make things clear and less ambiguity, EU Taxonomy has come up with a list of activities that are categorized and elaborated. Read it here.

What or who is EU Taxonomy?

It is basically a classification system established to clarify which investments are environmentally sustainable. The main aim is to prevent greenwashing and to help investors make greener choices.

How is ESG important for Indian Economy?

Before answering your question, Did you know that India witnessed Foreign Direct investment(FDI) inflow of $22.53 billion for April-June quarter, which was 90% higher from same period last year. Although this is good news but following the current trend of ESG in west side, Foreign institutions would check for ESG factors more often. Now there are steps taken regarding this matter in India, like incentives regarding Electric vehicle production, Business responsibility and sustainability report - a new reporting requirement by SEBI. But if we really need to be the go-to place for Foreign investors, we need to do more or more importantly government and corporates need to step up.

Are there any companies that score companies on ESG metrics?

Yes, there are a lot of them but some notable are Morningstar, Morgan Stanley capital international (MSCI), Bloomberg, etc.

Any word of caution?

Remember we mentioned Greenwashing above, that basically means a strategy adopted by companies that puts forward their ecological action to build a good image among public when in reality they aren't that environment friendly. So before relying blindly on ESG reports of company and pouring your money on basis of that, do your thorough research and follow the right sources.

Thank you and that's it from my side on this weekend pill.

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