ESG trends are gaining traction, investors need to align portfolios accordingly

By Parijat Garg.

Adam Smith said, “It is not from the benevolence of the butcher, brewer, or baker that we look to our dinner, but from their concern for their own interests.” What has not been said is that the baker makes money because society as a whole is willing to pay for bread. In capitalist economies, while profit maximization is the goal, it is not divorced from the demands of society. In fact, it is intimately linked to them. And what society wants today is undergoing a massive shift. A shift towards sustainability and social responsibility. Companies that do not meet these requirements expose themselves to serious risks.

The evolution of societal demand

Decades of effort by activists and NGOs have pushed issues of sustainability and social responsibility to the forefront of the social psyche. Whether or not they are willing to pay for it, consumers care about and respond to sustainability claims. You can’t find a plastic straw in an upscale restaurant today. It’s not because restaurants care about sustainability, but because their customers do. It has become impossible to buy branded clothing or stay in a hotel without encountering a sustainability claim from the brand.

Think about regulators. From the National Green Tribunal in 2010 to India’s Net Zero commitment, we have already come a long way. And the momentum is only growing in many dimensions of sustainability. In many ways, Chinese regulators have been very aggressive, banning the import of several types of plastics for recycling and shutting down several polluting industries en masse. China, which had so much to lose by doing this, did it. Therefore, the chances of other regulators following suit only seem higher.

What this means for investors

These tectonic changes create incredibly important sources of risk. And given the broad spectrum of sustainability and social responsibility, no company is immune to these concerns. If you’re making steel, you need to consider how much coal you’re burning. If you sell soft drinks, you need to be aware of your impact on groundwater levels. If you create software, you need to ensure that your workforce is diverse and that you provide a safe workplace. If you are caught out, you can face social and regulatory backlash that can weigh heavily on your business.

On the other hand, there is a great sea of ​​opportunities opening up as well. From organic food to electric vehicles, whole new markets are springing to life. Even mainstream industries are facing reorganization. From fast fashion to fast food, customers are seduced by promises of sustainable products and socially responsible practices.

As investors, it is almost irresponsible to ignore these forces. As consumer preferences and regulatory actions are increasingly driven by sustainability issues, does it make sense to silo these considerations into narrowly defined “ESG portfolios”? Would you ignore government capital spending plans when analyzing infrastructure companies? Or demographic shifts resulting in greater demand for denim jeans over sarees? So why would you ignore durability requirements?

ESG investing may have started as a way for some investors to ensure their money is not helping socially harmful companies. But that was a long time ago. ESG is now a force that affects every company and every investment. We all need to be ESG investors now. We ignore it at our peril.

(Parijat Garg is a fund manager and senior vice president at IIFL AMC. The opinions expressed are those of the author. Please consult your financial advisor before investing.)