As the World Economic Forum meets physically, Sustainable Development Goals (SDGs) and sustainable investing through a stronger focus on Environmental, Social and Governance (ESG) dimensions of corporations will be at the core of discussions. This article explores the interplay amongst SDGs, ESG and Impact investing and the kind of investments that the Indian government should focus on to build a more sustainable future for India.
SDGs are a collection of 17 interlinked global goals, such as no poverty, gender equality, quality education and sustainable cities, among others, set up in 2015 by the United Nations General Assembly and designed to be a “blueprint to achieve a better and more sustainable future for all”. The intent is to achieve these SDGs by 2030. Global partnerships such as government to government partnerships, public-private partnerships, and government and private sector engagement with civil society will need to be promoted to achieve the SDGs.
Within sustainable investing, there are various categories. ESG criteria are standards set by investors as their contribution to achieving SDG goals through their investments. Environmental criteria consider the impact of a company’s business on nature and the larger ecosystem. Social criteria examine how it manages relationships with its stakeholders, including employees, suppliers, customers, and the communities it operates. Governance deals with a company’s internal management keeping in mind best practices, their implementation through governance structure, internal controls, and robust and independent risk functions.
Impact investing is a further subset of ESG. There is no consensus on the definition of Impact investing. The common theme across various interpretations is a positive environment and/or social impact through the investment by the investor, with or without financial return. Therefore, while ESG is a framework for identifying non-financial risks that may have a material impact on an asset’s value, Impact Investing requires upfront identification of certain sustainability goals to be met by the investee company. Impact investors typically provide impact measurement tools to investee companies to track the positive outcomes of their investment.
Other than ESG and Impact investing, there is also Socially Responsible Investing (SRI), which lies between ESG and Impact Investing. It goes one step further than ESG by actively screening companies engaged with certain businesses, such as the production of alcohol, tobacco, or other addictive substances, defence equipment, or known to be involved in human rights and labour law violations, environmental damage etc. SRI screenings are typically used for public market investing.
The International Monetary Fund (IMF), in its Global Financial Stability Report (2019), recognises that socially responsible screening increases volatility, but the overall performance of sustainable and conventional funds remains comparable. The findings contrast with specific other results (Gasser, Rammerstorfer and Weinmayer, 2016), who, through an empirical analysis, demonstrated that investors choosing to maximise the social impact of their …….