What is Responsible Investment?

What is Responsible Investment?

World over the concept of Responsible Investing is gaining ground. Fund houses are coming up with responsible investment funds. Some funds are withdrawing their investment from some sectors which is against their responsible investment policy. Indices are being published covering only responsible investment options, even in India. And these investments are giving better returns to the investors. More and more corporates are following responsible investment policies.

Definition

University of Cambridge for Sustainability Leadership defines Responsible Investment is an approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance factors, and of the long-term health and stability of the market as a whole. It recognises that the generation of long-term sustainable returns is dependent on stable, well-functioning and well-governed social, environmental, and economic systems.

In simple words, companies which adhere to responsible norms are termed as ESG Responsible Companies and Investment in these companies are termed as Responsible Investment. ESG Responsible stands for Environmentally, Socially and Governance Responsible.

What is meant by ESG?

Many sectors are considered generally as not ESG-Compliant. For example, Nuclear Weapons, Greenhouse gas emitting sectors, manufacturing of tobacco and tobacco products, waste generation,   etc. are considered to be environmentally negative, Human Rights violations, Child Labour, sexual harassment, cyber security etc. are considered for Social scorecard. Track record of board of directors and their age, number of independent directors and women directors, attendance in Board meetings and committee meetings, remuneration to directors, whistle blower complaints, bribery and corruption, overall ethical standards are considered as Governance Scorecard.

The UNPRI is an investor initiative in partnership with UNEP Finance Initiative and UN Global Compact. It describes six principles of Responsible Investment:

1.    Incorporate ESG issues into investment analysis and decision-making processes.

2.    Be active owners and incorporate ESG issues into the ownership policies and practices.

3.    Seek appropriate disclosure on ESG issues by the entities in which they invest.

4.   Promote acceptance and implementation of the Principles within the investment industry.

5.    Work together to enhance their effectiveness in implementing the Principles.

6.    Report on our activities and progress towards implementing the Principles.

World over various other NPO’s and investors groups are propagating the ESG concept. SVVK is one of such investor association formed in Switzerland. EMPEA, a global industry association for private capital in emerging markets based in USA, IPF Environmental, Social & Governance (ESG) Interest Group based in UK are some other groups focussing on ESG.

Additionally, many investment houses and fund houses are promoting ESG on their own.

Indian Scenario

In India also, this trend is gaining currency in fast pace.

National Stock Exchange (NSE) in association with Stakeholders Empowerment Services (SES) conducted a study on ESG and its impact on companies. Out of the 50 samples they took, they concluded that companies have better scorecard in terms of ESG and the overall ESG score the sample stood at 71%.  They have also found that those companies have offered better returns to the investors.

NSE has come out with 2 indices viz. Nifty100 ESG and Nifty100 ESG Enhanced. These companies gave better returns to the investors compared to Nifty100.

Some Indian AMC’s have launched ESG funds in India. SBI, Axis and ICICI Prudential are some of them.

Recently, Norges Bank Investment Management, which is a $ 1 Trillion wealth fund based in Norway, announced that it is withdrawing from the Indian company Page Industries Ltd, a major player in textiles  and apparels for alleged human rights violations.

Similarly, SVVK, a Swiss association for responsible investment formed by seven major institutional investors based in Switzerland, excluded Tata Power, L&T, Bharat Dynamics, and Walchandnagar Industries as they are connected to nuclear weapon manufacturing.

To Conclude

As the Responsible Investment movement is gaining currency all over the world and increasing awareness and response to ESG among investors, corporates are now forced to align their policies in tune with the ESG principles. It will help then to attract and retain better investment. It will enhance their goodwill and valuation.

It will be a win-win solution for both the corporate and investors in the long run, of course with short term additional cost commitments for the corporates.