Okay but laana:
Is green the new black?
12th June 2021
Reading time ~ 3 minutes
Hi there,
Over the past couple of weeks, we've been hearing a lot about "impact investing," "ESG indices," "green stocks," and the likes. So, for this week's edition, we're going to be talking about the ESG push, what companies like Exxon and ITC are doing, and what that means for you.
Okay cool, so what is ESG?
Environmental, Social and Governance (principles)
Mhmm, but really, what?
So, as you might already know, companies report on their costs, revenue, profits, etc. in annual reports. The ESG framework is a way for companies to report on non-financial data, which covers:
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environmentally friendly policies
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socially responsible approach, and
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strong governance.
ESG metrics such as the below, help in assessing any risk that these factors might pose to the long-term sustainability of a business:
ESG was first mentioned in UN's Principles of Responsible Investing Report'06, with the goal of promoting sustainable investments. This has been further championed through the years at the World Economic Forum, International Business Council, and the likes. The idea is to promote reporting that takes into account not just profit, but also people and planet.
Apart from institutional and government pressure towards ESG, it makes sense for companies to adopt these practices. They are now catering to an audience that is much more socially aware and conscious, and wants to employ these practices in their everyday life - from what they eat, what they wear to where they invest.
Now, there's no denying that adopting these practices is a good look for companies and helps them build loyalty and be more competitive globally, but it also has it's long-term financial benefits. A simple example is renewable energy, which is becoming more and more affordable. Solar energy has become 90% cheaper since 2009, and while it may be an investment in the short term, moving to clean energy saves the company money in the long term.
Also, ESG is not trying to alter the business models of these companies, but make them more responsible, holistically. ESG makes companies report not only on how much money they are making but HOW they are making that money.
Take the case of ITC in India - which is primarily in the business of tobacco, and consistently does well in terms of making money. When you look at ESG metrics for ITC, you'd probably think that it won't fare too well (including me). But, even taking into account tobacco's effects on public health, ITC actually does fairly well in ESG metrics owing to it's efforts in being carbon positive for 15+ years, water positive for 18+ years, and waste recycling positive for 13 years, among others. Here are some ratings for India:
So, some companies are actually making an effort and employing sustainable practices. Then, there are others like Exxon. If you haven't heard of Exxon, it's one of the largest oil and gas companies in the world. Naturally, being in oil, they are not focused on climate change, but on "drilling every last molecule of carbon from the Earth." Anyway, so recently a few shareholders were like, okay this is not going to work for us - you need to get serious about climate change and move from your "oil is the future" rhetoric - not just because it's good for the environment but also because there's little future in oil and you're making us lose money. And obviously, Exxon took that as a joke, but the shareholders weren't having it. They went ahead and started a "re-energize Exxon" campaign and won some board seats; Long story short - Exxon, one of the world's largest oil companies, has to comply and is on its way to diversify to renewable energy.
So, if large companies weren't serious about ESG before, they have to be now.
So, what does this mean for me?
ESG is at a nascent stage in India. Most companies have just started to employ practices that fit in the ESG framework. Even if they might already be employing good practices, there is a lack of data collection and reporting in a transparent manner, which doesn't sit well for a ranking that is based on this data itself. In a welcome move, SEBI recently published a circular mandating the top 1000 companies in India to start adhering to their "business responsibility and sustainability reporting" format from 2022-23. This should hopefully help in standard and transparent reporting.
For investors, S&P has numerous index funds, which track companies with good ESG practices, such as the S&P 500 ESG index, S&P 500 Carbon Efficient Index, etc. (which actually have seen a huge inflow of money recently. Here's a great explainer on that). Closer to home, we're seeing new ESG mutual funds that invest in companies with an ESG focused outlook. Mutual fund houses are also setting up research teams focused specifically on ESG, to help research beyond what is already being reported.
While it'll take some time for ESG to become a part of day-to-day business operations in India and get good data, companies are getting into the groove - safe to say, government and investor pressure is making a difference to this end.
Thoughts? Reach out to me at rujgupta@laana.club
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