ESG investing gathers steam worldwide amid Covid-19 pandemic: Experts

Investors worldwide have been re-evaluating their portfolios based on environmental, social, and governance (ESG) parameters in the aftermath of the pandemic, with institutional players, wealth management clients, and millennials driving the change, a research note put out by EY India observed.

The consultancy said ESG factors were pivotal in driving the economy in the Covid era, and firms needed to integrate ESG investor expectations in the short-term as part of their stakeholder engagement practices and sustainability initiatives to stay more resilient.

“The Covid-19 pandemic has ascertained the importance of ESG in the businesses to manage risks, improve returns, and build resilience for crisis-resilient long-term value creation. As we look at the financial sector from the ESG lens, investors need to evaluate environmental and social issues that have a profound and direct role in the economic revival,” said Chaitanya Kalia, partner and national leader, Climate Change and Sustainability Services, EY India.

India, too, witnessed traction in ESG-related decision-making and product offerings, such as ESG-focused mutual funds, EY said. Market regulator Securities and Exchange Board of India (Sebi) has also recommended that assets managers engage with portfolio companies on ESG risk management and performance. The regulatory push may nudge asset managers and financial intermediaries to actively obtain and analyse the ESG-related data from companies in which they invest, either directly or indirectly.

According to EY, banks can play a crucial role in mitigating ESG risks, particularly in emerging markets, because of their role as financial intermediaries and capital raising agents. “The banks, in their capacity as catalysts in promoting economic development, must encourage sustainable business practices. If they fail to do so, banks may end up facilitating practices that have significant negative environmental and social impacts, including the risk of stranded assets.”

Risks and opportunities offered by ESG factors must also be considered by insurance firms, which typically have a long-term horizon, and can play a major role in financing the move towards a low-carbon economy, it further noted.

The recent data suggests that ESG-related funds outperformed the markets over the first quarter of the year — when the Covid-19-triggered economic crisis started. According to research firm Morningstar, investors globally poured in $45.6 billion into ESG funds in the first quarter of the year, compared to the outflows of $384.7 billion for the overall fund universe. The MSCI World ESG Leaders Index, for example, outperformed the regular index by 1.36 per cent on the quarter. According to Morningstar, 70 per cent of responsible investment funds outperformed their peers in the first quarter.

However, according to a survey by EY, only 25 per cent of investors believe the current financial reporting clearly conveys how a company can create future value through its investments. There is also lack of standardisation in ESG metrics.

For instance, while the development of rating systems has boosted the ESG investing landscape, each rating system involves its own sourcing, research and scoring methodology, resulting in a single company being rated differently across the data sets released by different ESG rating agencies. This can pose a challenge to investors.