Companies with higher ESG score are better investment picks

NEW DELHI: Sustainable investing has emerged as a major trend over the last few years . It focuses on how companies handle their ESG (environmental, social and governance) risks, which is particularly important for emerging markets like India. “In our country, the environmental and labour standards, quality of corporate go vernance and the level of transparency are generally lower than that of develop ed markets,” says Sivananth Rama chandran, Manager, New Product Development (Indexes), Morningstar India.

Factors driving the interest in ESG include regulatory changes and increase in foreign investor interest. “Most forign institutional investors are moving their portfolios towards ESG-compliant businesses. Indian companies may face a sell-off if they fail to adopt ESG-friend ly practices,” says Ramachandran.

Sustainability screening allows you to invest in companies that are best managing their ESG-related risks and are supporting the transition to sustainable global economy. According to the Morningstar India Sustainability Index, Indian companies fare better than those in other emerging markets in this regard.

Companies that do not have exposure to serious ESG-related controversies score well on the index, while companies with high controversy scores are deleted quarterly. Factors such as labour relations, data security and energy use are taken into consideration for determining the ESG score for companies.

The Morningstar India Sustainability Index has returned 14.8% from 2012 to 2016, compared to 13.7% for the Morningstar India Index.

Therefore, screening companies based on sustainability could be very rewarding, but the reporting formats could pose a challenge, as they are still evolving.