INDIA’S TRYST WITH ESG- INCREASING FINANCIAL BURDEN ON PUBLIC SHAREHOLDERS
Author: Bhavika Verma, IV year of B.A.,LL.B. from National Law University, Jodhpur
I. The bad and the ugly of ESG
The whole framework of Environmental social responsibility (“ESG”)has lot of grey area. Here is the reality check for you. Gone are days when selling ESG funds was once a simple marketing ploy for fund managers. With the introduction of ESG scheme Investmenton the basis of environmental, social and governance formula has become an extremely popular Full-service asset managers who struggle to compete with low-cost tracking funds now have a new market to turn to. The environmental component of these claims is increasingly under scrutiny, even though this type of ethical investing may generally mean different to different kinds of people. From my opinion most of these are just gimmick and increasing Financial Burden on Public Shareholders.
Financial return has traditionally been the main factor influencing investor’s decisions regarding their investments. The ESG regime where E stands for Environment, S for Social, and G for Governance, has recently become popular among some investors around the world. ESG investing, according to proponents, is based on the investee company’s treatment of the environment, concern for its employees, and management style.
The answer is at the heart of all ESG investing, where assets have alreadyexceededaround thirty-fivetrillion-dollar mark in 2020. However, ESG investing is not new because it has existed in various typeslike green investing, socially responsible investing, sustainable investing, ethical investing, and impact investing. Not surprisingly, as with any other issue, ESG investing has divided the investing public into pro-ESG and anti-ESG agenda.
II. Is ESG funds trustworthy?
There is no question that organisations and people alike must act in a way that supports societal objectives as well as the ultimate goal of protecting the environment. However, predictably we are coming to a new self-appointed bureaucracy that claims to be able to evaluate businesses on whether or not they are meeting these high-minded goals. What even more unacceptable and real concern is ESG measures are being adopted as investment criteria by the funding industries. Even you may be wondering that it’s a good thing. But it seems like another attempt to make it difficult to compare the performance of your fund to any benchmark or group of peers. I realised that one of the oldest equity funds in India had now become an ESG fund, However, after three decades, it has now taken on the garb of an ESG fund
Fund companies like to invent themes to confuse customers and make it easier to sell mediocre funds. This is the basic market strategy of funding companies to allude customers and make it easier to sell mediocre funds. These funding companies makes every effort to distinguish their goods in the market. As a result, fund companies frequently claim that their fund’s investment strategy is distinctive. The fund company can now assert that the fund should only be judged based on its own declared characteristics and not by comparing it to any other funds, which is an attempt to de commoditize the fund. Furthermore, the ESG ratings are not trustworthy. Despite having a poor human right and labour record or having questionable envir0nmental impacts, many companies receive high environmental and social ratings.
III. Muddling up of resources
Basically, investing has engagedmuddling up our financial resources among different financial goods in order to make money or profit. Beyond just looking at how much amount of money a company makes, ESG investment also considers how money is made.
From aroundlast two decade the ESG movement has developed from a simple corporate social responsibility (“CSR”) initiative to a widespread phenomenon in the world of investing.Some international funds have been stretching the original definitions of ESG and sustainable investing to make money, having valid reasons for doing this. Given the obvious fear of missing out with regard to the ESG scheme. Millennials, Gen Xers, and Boomers all preferred to own sustainable investments.
The question of whether an ESG label on a fund is necessary will remain a challenge for regulators around the world. The Securities and Exchange Commission in the US may soon demand more information about how ESG principles fit into investment strategies.
IV. Ineffective results till date
Despite all the fuss, financial returns from ESG-focused mutual funds have also been lacking. Individual one-year fund returns range from around -9 to +27 percent, bringing the category average in flat markets to an unimpressive -0.15 percent. Seven funds negative returns prevent them from using any risk-adjusted return analysis. The ESG thematic category is among the worst of the 20 broad categories that the industry tracks due to the pitiful returns. However, over the course of a year, ESG funds appeared to have outperformed sectoral funds invested in the pharmaceutical and information technology industries as well as international equity funds.
But determining the points is not that easy. Due to the unclear nature of the ESG parameters, it has too many problems and is confusing. For instance, IT companies would be rated two that is low ESG risk because they practise producing little to no carbon emissions. This apparently make these companies as environmentally friendly but on the contrary, these businesses are currently being scrutinised for their data privacy policies, which renders them incompliance with the social component of ESG.
V. The investment not exclusive
Corporate executivesseeking to increase the long-term value of shareholders in competitive labour and product markets should naturally take into account the interests of their employees, customers, communities, and the environment. fixing ESG goals may therefore lead to distortions in decision-making. There are results which shows that companies use ESG to hide the poor business conduct. Furthermore, when managers fail to meet earnings expectations, they frequently publicly discussed their ESG agenda. As a consequence, sustainable fund managers who focus on publicly traded firms that openly uphold ESG principles risk overinvesting in financially struggling firms.
Thus, it can be said thatFunds that invest in businesses that openly support ESG give up financial returns without gaining very much, if anything, in terms of actually advancing ESG goals. Also, you might believe that ESG scores are based on how good a company benefits the world. However, they may be determined by how well the policies increase the company’s profits.
VI. Proper plan missing
A major issue is absence of appropriate rules with regard to ESG. It becomes problematic for businesses to evaluate and report ESG efficiency as well as for investors to compare and pick ESG investment in a consistent manner. Further, it becomes challenging for investor to evaluate company’sperformance in ESG due to lack of transparency and information.
Additionally, the risk of ESG investing is that it may persuade policymakers that the market can solve major social issues like climate change, which can only be solved with the help of government policies and measures
VII. Heavy prices
One of the potential challenges is investing in ESG will incur huge amount of expenses. The investment needed to alter on-going business functioning. This would include increasing energy efficiency to putting new policies and procedures in place. Also cost would be involved to educate employees on new procedures
The significant effect on operation of the company is also another expense to take into account. Business operations may need to change as a result integration of ESG, which could cause disturbances. Further switching to ESG may also lead to revenue expenditure in the short term
This lofty price obviously can be paid by big investors and businesses but the small companies and business will have to suffer and may even impact their business.
VIII. Conclusion: beware of green washing
With the increased demand from investors, many aspiring corporate leaders have begun greenwashing in order to increase their company’s market valuation. This is a method of giving the notion that a particular company’s products are environmentally friendly or of making false statements to that effect.In an effort to stay away from this unusual issue, India, for example, has drafted environmental related rules and regulations that will call for businesses to give thorough data on emissions beginning in the following financial year. According to the regulations, corporates must submit information on more than one hundred and twenty metrics, as well as data from last two years.
Since there is no standardisedbasis for ESG ratings, despite the fact that ESG relies on independent rating agencies to evaluate businesses based on their credentials. What constitutes adherence to ESG principles has become murky due to inconsistencies. This leaves room for ESG misbehaviour.
Such occurrences can be prevented by clear, concise, and applicable rules, ensuring that only the best performers in the ESG landscape receive investments and generate returns for investors. On the other hand, stakeholders will have less room to manoeuvre if ESG businesses and vehicle for investment like funds become true-to-label. Certain funds may find it challenging to adjust their investment strategies in order to pursue alpha due to standardisation. Some may contend that ESG investors need to consider more than just financial gain. Hence, investing in ESG is not clearly the best option.