Viraj Nanda is the Chief Executive Officer and Co-Founder of Globalise. In his role at Globalise, he is responsible for designing and implementing the strategic direction for expanding Globalise’s footprint in India. He is also actively involved in evaluating all prospective M&A and business opportunities. Viraj began his career as an Investment Banker at Deutsche Bank in London. As a part of the Financial Institutions Group, he was predominantly focused on the FinTech vertical, working with clients across payments, digital banking and lending, and WealthTech. He was also a member of the advisory team for select strategic clients across the Banking and Speciality Finance verticals. Viraj graduated cum laude from the University of California, Los Angeles (UCLA) with a B.A. in Business Economics and College Honours.
On a global level, businesses have been working towards contributing positively to the environment and other social causes through various Corporate Social Responsibility (CSR) initiatives.
At the same time, companies are also striving to strengthen their ESG scores. ESG stands for Environment, Social, and Governance, and it is increasingly becoming important for investors when they analyze a potential investment. Several countries, including the United States, UK, France, and Germany, have been enacting laws to tackle climate change. There has also been a continuing effort to make companies more transparent in terms of their governance standards. Major institutional investors like sovereign funds and pension plans have been scaling up their investment research processes, especially in screening methods that incorporate ESG factors. Different participants spread across units such as businesses, government, asset managers, and regulatory bodies are positively acting upon the opportunities associated with ESG investing.
Global Positioning of ESG
According to a recent report by US SIF Foundation, in 2020, the assets under management that used ESG strategies grew to an astonishing $17.1 trillion. This growth denotes an increase of 42% over the size of investments that used ESG strategies in 2018.
As seen above, ESG funds have been growing popular among many investors. Several asset-management companies have been considering a holistic approach by considering both financial health as well as the long-term viability of a company’s business. Investors have also shown plenty of interest in areas such as zero waste, low carbon footprint, minimum pollution, good governance principles, fair treatment of employees, and sustainability.
There is also an objective analysis of ESG parameters, with scores assigned for each component. For instance, JUST Capital, a US-based entity, ranks companies based on factors such as fair wages, environmental impact, governance standards, diversity of the board, etc. The firm has also launched the JUST U.S. Large Cap Diversified Index that includes the top 50% of the companies completely based on these rankings. This index returned 15.94% last year, outperforming the Russell 1000.
Environmental impact is one of the key parameters within the ESG framework. With the volatility in crude oil prices, ongoing concern about global warming and climate change, several governments have introduced measures to adopt more renewable energy sources. An increase in government spending, regular incentives to increase investments, and new policies that favor renewable energy have been instrumental in making the renewable energy sector a favorite among ESG-focused funds.
The renewable energy sector is in its early stages of growth, and there exists plenty of potential for technology to disrupt this space. Innovation in this space is ever-evolving with a focus on areas like reducing the cost of installation and enhancing the adoption of renewable energy in economically backward regions of the world.
Improving the ESG parameters can also help gain competitive advantages, at least in some of the environmentally sensitive businesses. For instance, Coca-Cola reduced their water consumption in their bottling units by around 20% over the last ten years. Similarly, Marks and Spencer followed a strategic plan whereby they aimed to decrease waste, source responsibly, and help build communities in the neighborhoods. This set of actions led to the firm saving $200 million annually.
Investors can use ESG as an additional filter when screening for investments or do an outright ESG integration. In an ESG integrated process, all investment decisions are made based on an ESG framework.
For investors looking for diversified exposure to the ESG theme, ESG-focused ETFs can be considered. Large asset managers have launched ETFs in this space, and instruments like the iShares Global Clean Energy ETF (ICLN) and Invesco MSCI Sustainable Future ETF (ERTH) provide a straightforward way for investors to build exposure to the ESG theme.