ESG considerations are important for all aspects of investment management including asset allocation, security selection and portfolio construction. Representative imageThe demand for ESG investing has been increasing in India and other countries. More so due to the growing realisation of climate change implications and the social consequences of the Covid-19 pandemic. According to Vidhu Shekhar, Country Head-India, CFA Institute, the global sustainable investments are growing rapidly and reached $35 trillion or 36% of the total assets under management in 2020. In India, almost all sustainable investment products have been launched in the last two years, highlighting its tremendous growth potential.
Shekhar says that in many ways, we are moving from sustainable investing as a good thematic idea to a reality that has implications for all investment portfolios. This recognition is fuelling demand for ESG expertise. To cater to this, the CFA Institute is offering a Certificate in ESG Investing to provide candidates with both practical application and technical knowledge in the fast-growing field of ESG investing.
In an e-mail interaction with FE Online, Shekhar throws more light on the opportunities and trends in ESG investing and how can Indian investors benefit from it. Edited excerpts:
What is ESG investing? How much relevant is it today from investors’ point of view?
ESG investing, put simply, is an investment process that takes into account sustainability, or environmental, social, and governance issues. The ESG investing approaches range from a simple exclusionary screen based on norms or values (exclusions-based screening) to an ESG integration process, where ESG considerations are applied to the fundamental cash flow analysis, or security selection.
The demand for ESG investing is growing for several reasons but primarily because investors recognize that ESG factors like climate change have a real long term impact on the value of their investments.
People generally invest their money in any fund for good returns in the short or long run. Can ESG investing serve this purpose as well?
Companies increasingly derive their value from intangible assets which are not captured in their balance sheets, like their people, use of natural capital, and reputation. Therefore analysts are well-served by analysing these non-financial information captured by the ESG factors, not only to improve their fundamental analysis, but also to assess the companies on risk dimensions. Companies that have poor governance, or which fail to consider environmental and social impacts, are unlikely to prosper over the long term. Funds that do not take ESG factors into consideration are not fulfilling their fiduciary duty towards investors.
Has investors’ interest in ESG investing increased or decreased?
Investor interest in ESG investing is increasing in recent years. According to the 2020 CFA Institute Trust Survey, conducted among 3,525 retail investors and 921 institutional investors across 15 major markets including India, we find that only 19% of institutional investors and 10% of retail investors currently invest in products that incorporate environmental, social, and governance (ESG) factors. But 76% of institutional investors and 69% of retail investors expressed interest in ESG.
Many investors are becoming more conscious of the environmental consequences of climate change, and the social consequences of the pandemic, which is driving interest in ESG investing.
What was the ESG investing trends in India and globally this year?
Global sustainable investments are growing rapidly and reached $35 trillion or 36% of the total assets under management in 2020. In India, almost all sustainable investment products have been launched in the last two years, reflecting increasing interest and potential.
How can an Indian investor benefit from ESG investing?
ESG investing offers Indian investors the ability to express their ESG preferences in their investments. For example, the cement sector is important for a growing economy with infrastructure needs. But cement manufacturing is also an energy-intensive process. ESG funds that invest in cement companies may invest in those companies that take actions to reduce the carbon intensity in their manufacturing, which is appealing for environmentally conscious investors. In addition, if regulations around carbon emissions become stricter over time, these companies are better positioned compared to those which fail to make those investments.
Why was there a need for a certificate course in ESG investing? Who can apply and benefit from this certificate?
ESG considerations are important for all aspects of investment management including asset allocation, security selection and portfolio construction. ESG is not just for specialists anymore. Everyone in the investment decision making value chain needs to understand ESG and incorporate it into their practice. Our analysis found that less than 1% of the 1 million investment professionals on LinkedIn had disclosed sustainability-related skills in their profile, even though the demand for sustainability talent is rated as “very high.”.
CFA Institute Certificate in ESG Investing offers candidates both practical application and technical knowledge in the fast-growing field of ESG investing — an opportunity to both accelerate progress and demonstrate purpose. There are no formal entry criteria for this qualification, but it is strongly recommended that candidates have a solid grounding in the investment process achieved via formal qualification or experience.
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