By Sneha Joshi
Sustainability is now a non-negotiable in investment decision making. For investors to understand the characteristics contribution to the longevity of the companies and for businesses to survive through material impacts of future crisis, incorporating Environment, Social and Governance factors becomes a necessity.
The main question that pops up is whether that comes with compromised returns. Many research agencies are of the view that companies with a strong ESG profile have the potential to outperform those with poor ESG profiles. It is believed that companies focusing on sustainability are better positioned to sail through adverse situations with a lower drawdown while still benefitting in the upcycle as compared to their peers with less or no focus on sustainability.
The test of this conviction is the outperformance of 51 out of 57 global sustainable indices against their broad market counterparts as reported by Morningstar in the first quarter of 2020, during the depth of crisis. Another evidence to back the belief is when 15 out of 17 MSCI ESG indices outperformed the broad market counterparts across regions in the same period.
It can, however, be questioned whether a short stint is enough to prove the mettle of ESG investing. ESG investing in India certainly delivers on resilience, especially during the downturns in 2008, 2011 and 2015.
An analysis of ESG outperformance reveals that ESG factor biases towards quality and low volatility, which in itself indicates strong resilience. This further proves that ESG investing has huge potential to deliver.
The crisis has damned the risk appetite and return expectations, ESG investing is an avenue to invest in companies with good customer relations, best corporate practises, social consciousness and sound management that will in turn translate into resilient and strong financial performance in the long run.
While companies shutting down, unemployment is rising, fiscal deficit increasing and high uncertainty, investors will become more and more conscious about the impact these externalities have on the companyâs business. ESG investing delivers on values, best practises and sustainability, making companiesâ future ready to take on the global challenges!
Donât let this crisis go wasted, one thing to learn from it is to choose both resilience and returns together and not just one!
(Sneha Joshi is the Associate Fund Manager â Alternative Investments, Quantum AMC.)