Environmental, Social, and Governance (ESG) investing has fast become a global phenomenon. Global ESG indices have outperformed the traditional benchmarks over the past decade.
Sustainable investing assets under ESG have grown at a CAGR of 15% (2012-22) to US$53.7 tn globally. S&P500 ESG has beaten the benchmark by 459 bps during this period. It is a testimony to the soundness of this investment strategy.
ESG focuses on the following factors to create value:
1) Early recognition of changing trends and prudent capital allocation towards sustainable opportunities,
2) Efficient utilization of natural resources and emission reduction,
3) Increased employee productivity by maintaining healthy labour relations and facilitating human capital development, and
4) Reducing the risk of penalties and closures by working towards climate change.
ESG: Risks and Opportunities
As per a Kotak Institutional report, capital goods, financials, IT services, and healthcare services, are the best-placed sectors within the ESG framework.
IT services are the prime enabler for digital adaptation. Hence, it offers great potential under various ESG opportunities.
Financials also stand to benefit substantially from ESG opportunities in India. It has a vast potential under the themes of financial inclusion, affordable housing, and healthcare insurance.
Apart from that, capital goods can benefit from the opportunity to innovate. And, the healthcare sector has vast opportunities due to the vast gaps in India's domestic health care infrastructure. The pharmaceutical sector also ranks high on the ESG factor for its potential to produce affordable medicines for the global market.