ESG investments or Socially responsible investments is a very popular investment strategy in US and Europe. According to data from Morningstar, As of March 2020, US has total assets of USD 119.33 billion and Europe has total assets of USD 683.87 billion under the ESG investment strategy. In India also, ESG investments has started getting more attention amid the corporate governance issues many companies faced over last few years. But what exactly is ESG investments? And does it work in India? Which stocks would come under ESG framework? We will address these questions in detail in today’s blog.

What is ESG Investments?

ESG i.e. Environmental, Social and Governance criteria are set to identify companies which are socially responsible and conscious. Broadly, these include,

  1. Environmental criteria check how a company performs as a steward of nature.
  2. Social criteria examine how a company manages relationships with its employees, suppliers, customers and the communities where it operates
  3. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

If one looks at recent events, when a promoter is involved in illegal or unethical activities, it becomes very difficult for businesses to come out of promoter’s shadows, pick itself up and start doing well again. If a you invest in ESG compliant stocks then long-term sustainability in the performance can be seen.

Considering the increased interest in ESG investments, Bombay Stocks exchange launched an ESG specific index in 2017. Let’s look at this index in more detail.

S&P BSE 100 ESG Index

The S&P BSE 100 ESG Index was launched on 26th October 2017. It currently has 65 constituents with average market cap of 1,03,356.30 crores. From the universe of S&P BSE 100 stocks, the stocks which fit in the ESG criteria are included in this ESG index. The specified exclusion criteria based on index methodology is:

  • Tobacco – All Tobacco producing companies as well as companies with tobacco sales greater than 10%.
  • Controversial Weapons – All companies producing cluster bomb systems, key parts, landmines, or nuclear weapons
  • UNGC Score Disqualified Companies – UNGC score is based on factors like Human Rights, Labor Rights, Environment and Anti-Corruption

The index gets rebalanced every year and the first value date for the index is 30th April, 2014.

As of June 30th 2020, the top 10 constituents of S&P BSE 100 ESG Index and the sectoral breakup is as follows:

Top 10 Constituents of S&P BSE 100 ESG Index

Reliance Industries Ltd Energy
HDFC Bank Ltd Financials
Infosys Ltd Information Technology
ICICI Bank Ltd Financials
Tata Consultancy Services Ltd Information Technology
Kotak Mahindra Bank Ltd Financials
Bharti Airtel Ltd Communication Services
Axis Bank Ltd Financials
Maruti Suzuki India Ltd Consumer Discretionary
State Bank of India Financials

Sectoral Breakup of S&P BSE 100 ESG Index

Sectoral Breakup of S&P BSE 100 ESG Index

Performance of S&P BSE 100 ESG Index Compared to the S&P BSE 100 Index

We now know what constitutes the ESG index. But historically, did ESG as a strategy beat the normal index? Let’s look at the comparison of historic returns:

Index 1 Month Return 3 Month Return 6 Month Return 1 Year Return 3 Year Return 5 Year Return
S&P BSE 100 ESG TRI 8.66% 22.70% -12.93% -8.95% 5.44% 6.84%
S&P BSE 100 TRI 7.41% 20.27% -14.39% -11.54% 3.13% 5.60%

The return is as on 30th June 2020.

Clearly, the ESG index has outperformed the broader BSE 100 index across the different time periods. Even if we look at calendar year returns, this trend is clearly visible.

Index 2019 2018 2017 2016 2015
S&P BSE 100 ESG TRI 12.82% 3.81% 33.73% 5.95% -2.78%
S&P BSE 100 TRI 10.92% 2.62% 33.27% 5.02% -1.95%

However, the outperformance in between the two indices is marginal. So, for such marginally positive return, should you go with ESG strategy? Here’s our take on this.

Should You Invest Using ESG Strategy?

ESG is a qualitative concept where you are selecting a stock that fits all the three criteria of Environmental, Social and Governance. This type of investment strategy protects us from various risks like Reputational Risk, Litigation Risk, Financial Risk, Regulatory Risk etc. A minor slippage in terms of any of these important factors can lead to wealth destruction. In India, we have seen multiple instances in recent past. IL&FS, DHFL, Yes Bank are just a few of them.

We believe that from a long-term investment perspective ESG strategy can help in avoiding exposures to companies with underlying issues in any of the ESG factors. While you can take tactical exposures across non ESG stocks as well, focusing in ESG stocks over long term can lead to a significant wealth creation.