Page 47 - Banking Finance August 2022

ARTICLE

2. The profile of the investors is changing. Millennial
investors have inherited huge amount of money and
therefore are wealthy. They prefer responsible
investment as investment for them is to express their
values.
3. Improved data gathering techniques have made
available more granular data on the performance and
activities of the companies which can be harvested to
assess the ESG commitment of the companies.

Covid19 has made ESG investing more relevant and
important both for the businesses and investors with
growing realisation that business must be in harmony with
the environment and society to achieve increased resilience
The traditional approach of investing considers only financial
against disruptions. The "green swan risks' are potentially
parameters and looks at financial risk reward balance.
more serious than systemic risk as they pose a threat to the
Responsible or sustainable investing (ESG) concept evaluates
existence of not only economy but humanity too. Extreme
not only financial parameters but ESG parameters also to
weather conditions will pose threat to infrastructure and
improve long term outcome as it considers ESG factors also
worsen credit, operation, and liquidity risks. The current
as economic factors. ESG data is being increasingly used to
asset prices are not discounting/reflecting the possible
identify material risks to have a full understanding while
impact of climate risk.
assessing the worthiness of a company for investment. ESG
investing is based on the concept of sustainable investing
The central banks are aware of these macro financial risks
i.e. investing in companies who vouch for ESG theme-
and formed "The Network for Greening the Financial System
wellbeing of the stakeholder.
(NGFS)" in 2017 to develop and propagate research on
climate related risks which can be used to align their
Environmental empathy, Social responsibility and Ethical
monetary and other policies to green financing. RBI also
Governance are three pillars on which the concept of ESG
became a member of the NGFS in April 2021 and in its
investing rests. Environmental empathy is judged based on
Financial stability Report (FSR) 2021, climate risk has been
the approach used by a corporate towards clean energy,
identified as a major risk to financial stability. Business
waste disposal, pollution prevention, water conservation
Responsibility and Sustainability Reporting (BRSR, May
and climate change. Gender equality, Labour welfare &
2021), the new reporting requirement of SEBI which is
rights, women empowerment, donations to social causes
reduced inequality and ensuring product quality helps an
organisation being socially responsible. A fair and
transparent corporate governance which is based on
efficient and strong internal control, ethical practices and a
strong management culture ensures that the company will
fulfil its environmental and social responsibilities.

The growth of ESG investing can be attributed
to three factors:
1. The face of planet is changing. Climate change, natural
calamities, environmental imbalance, rising economic
and social inequality have far-reaching impact on the
world.

BANKING FINANCE | AUGUST | 2022 | 47