Environmental, social, and governance (ESG) investing is gaining momentum as more investors recognize the importance of considering non-financial factors in their investment decisions. ESG investing involves integrating environmental, social, and governance considerations into investment decision-making. By doing so, investors can gain a more comprehensive understanding of the long-term sustainability and profitability of the companies in which they invest.

One of the main advantages of ESG investing is that it can help investors cover blind spots and uncover risks that they weren’t monitoring. Blind spots refer to areas where investors may not have considered certain risks or opportunities that could impact the performance of their investments. ESG investing is a valuable approach that can aid investors in uncovering risks related to environmental, social, and governance factors that

As global environmental regulations continue to tighten, it is increasingly important for investors to monitor a company’s environmental practices. Scrutiny on a company’s environmental impact is becoming more prevalent, and pressure from consumers is mounting for companies to take action to reduce their carbon footprint and adopt sustainable practices. By evaluating a company’s environmental factors, investors can gain a better understanding of the company’s long-term viability and potential to create value for all stakeholders.

For example:
Adani Power’s 4,620 MW thermal power plant in Mundra, Gujarat faced allegations of environmental violations and damage to local fishing communities. In 2011, the Ministry of Environment and Forests issued a show-cause notice to the company, and in 2016, the National Green Tribunal imposed a penalty of Rs. 105 crore for environmental violations. These controversies led to a decline in Adani Power’s share price.

Company’s social risks can highlight important factors that can affect its long-term viability and potential to create value for all stakeholders. Social risks include a company’s impact on employees, customers, suppliers, local communities, and society as a whole. For example, a company that has a poor track record in terms of employee health and safety may face higher employee turnover, lower productivity, and increased legal and reputational risks. A company that produces products that are known to be harmful to human health or contributes to social inequality may face backlash from customers and regulators, leading to lower revenue and profitability. Therefore, considering social risks is crucial for investors to gain a comprehensive understanding of a company’s operations and its potential to create value over time.

For example:

In 2020, HUL faced backlash over its skin lightening products, with critics alleging that the products perpetuate colorism and contribute to social inequality. HUL eventually announced that it would remove the terms “fair,” “white,” and “light” from its products and advertising. The infamous Fair & Lovely cream was renamed to ‘Glow & Lovely. However, the controversy led to a decline in the company’s share price.

The increasing number of governance-related issues in companies has made it more important than ever to monitor a company’s governance factors. Poor governance practices such as lack of transparency or accountability, conflicts of interest, or a board that lacks diversity and independence can result in reputational and legal risks, leading to significant losses for investors. By evaluating governance risks, investors can make informed decisions about a company’s long-term sustainability, its business model, and its potential to generate value for all stakeholders. As a result, companies with strong governance practices are more likely to attract long-term investors and sustain their growth over time.

For example:
Byju’s, an Indian edtech company, faced governance issues in 2021 resulting in a decline in its valuation. The company’s founder and CEO, Byju Raveendran, was criticized for holding a significant amount of voting rights and for not disclosing enough information to investors. Byju’s announced governance reforms, including new independent directors and a commitment to greater transparency and disclosure. However, the company’s valuation remains under pressure, highlighting the importance of effective governance practices for startups. These issues also show the potential risks for investors when governance practices are not in place.

In conclusion, the rise of ESG investing reflects a growing awareness of the importance of sustainability, social responsibility, and good governance practices. By integrating ESG considerations into investment decisions, investors can not only contribute to a more sustainable future but also achieve attractive financial returns. Companies that prioritize ESG factors are better positioned to weather risks and seize opportunities in a rapidly changing world, and investors who incorporate these factors into their investment process can build more resilient and profitable portfolios. As more investors demand ESG integration and transparency, companies and financial institutions will need to adapt and evolve to meet these expectations. With the right incentives and policies in place, ESG investing can help drive positive change in the corporate world and promote a more sustainable and equitable global economy.