ESG Investing in India: Meaning, Benefits and How to Invest

With growing concerns about global warming, toxic and unsafe workplaces, SEBI has made ESG reporting mandatory for India’s top 1,000 listed companies based on market capitalisation. Third-party firms would evaluate and assess a company’s ESG performance and assign ESG scores accordingly.

Investors who value environmental preservation, social responsibility and good corporate behaviour opt to invest based on the company’s ESG scores and financial performance.

Let’s understand what ESG investing is, its importance, benefits and how you can start ESG investing.

What Is ESG Investing?

ESG (Environmental, Social and Governance) investing is a type of investment strategy that selects investments based on the companies' environmental practices, ethics and corporate behaviour, along with financial performance. It is also known as sustainable investing.

In India, the top 1,000 listed companies have to submit and disclose their Business Responsibility and Sustainability Reports (BRSR), and provide tangible data on their ESG projects.

The Three Pillars of ESG

There are three pillars of ESG based on which investors evaluate a company.

Environmental

The environmental pillar assesses how responsibly a company protects the environment. This includes factors like proper waste management, reduction of carbon emissions, treatment of polluted water before discharge and the use of renewable energy sources.

Social

The social pillar measures how a company prioritises employee safety, diversification, compliance with labour laws and how it manages its relationship with its vendors, customers and the local community.

Governance

The governance pillar assesses the company’s corporate behaviour and leadership practices. It evaluates factors such as the company’s business ethics, anti-corruption policies and internal control.

How To Start ESG Investing?

It’s recommended that investors identify the ESG pillar that matters most to them before selecting companies for investments. Investors can check the ESG scores of listed companies by visiting the websites of ESG rating agencies such as ESGRisk.ai, CRISIL ESG Ratings, and SES ESG.

Here’s how you can start ESG investing based on your risk profile and investment approach.

Direct Investments

Investors can visit the ESG ratings agency website to assess the company’s ESG score, and if its ESG practices align with their values, they can directly invest in the company’s stock. Investors are strongly advised to evaluate the company based on their financials and past performance, and not just based on ESG.

ESG Mutual Funds

Investors seeking a passive ESG investment approach, they can invest in ESG index funds that track the Nifty 100 ESG companies or in ESG-themed mutual funds. These investments can also be made through SIPs (Systematic Investment Plans) and pay a fixed amount regularly instead of one lumpsum amount.

ESG Exchange Traded Funds

Investors can also invest in ESG ETFs that replicate the Nifty 100 ESG index and offer similar returns. The Nifty 100 ESG index has delivered a CAGR return of 11.94% over the last 5 years, which is comparable to the returns generated by the Nifty 50 index.

Benefits of ESG Investing

The following are the benefits of ESG investing.

Risk Management

Companies that focus on strengthening their ESG system mitigate the risk of penalties, labour strikes and reputation damage. Such companies not only reduce these risks but also ensure seamless growth, offering long-term growth to investors.

Regulatory Transparency

SEBI mandates the top 1,000 listed companies to maintain and disclose the Business Responsibility and Sustainability Reporting (BRSR). This offers investors access to real data to assess the company’s ethics and sustainability practices.

Long-term Performance

A robust ESG framework helps build investor confidence, reduce downside risks, stabilise valuations, and experience less volatility during market corrections, as it attracts long-term capital.

Attract FII Capital

Foreign Institutional Investors (FIIs) highly value ESG frameworks when making investment decisions. Indian firms with high ESG scores may attract higher FII flows, which can positively impact their stock prices.

Should You Invest In ESG Stocks?

ESG investing is suitable for all types of investors who value environmental protection, social responsibility and ethical corporate governance. However, investors should not make investment decisions solely based on their ESG scores. They should also assess important financial factors such as revenue growth, management quality, debt levels and growth potential before investing.

FAQs

What is ESG investing in India?

ESG stands for Environmental, Social and Governance. ESG investing is a strategy where investments are based on the company's sustainability practices, environmental impact and corporate behaviour, along with financial performance.

What are the benefits of ESG investing?

ESG investing offers various benefits, such as transparency, good long-term performance, and exposure to companies with competitive advantages.

How to start ESG investing?

You can start ESG investing in India by directly investing in companies with high ESG scores or by opting for ESG ETFs and mutual funds.

How are ESG scores calculated for companies?

SEBI-approved agencies calculate a company’s ESG score by analyzing its Business Responsibility and Sustainability Report (BRSR) disclosures, combining environmental, social, and governance data to give an ESG score.

Can ESG investing offer long-term wealth creation?

ESG investing can offer long-term wealth creation, provided the company manages its finances well, has competent management, and expands strategically.