ESG Investing
ESG investing integrates Environmental, Social, and Governance criteria into the investment process alongside traditional financial analysis, aiming to identify companies that manage non-financial risks effectively and align with sustainability principles.
The ESG framework evolved from the earlier concepts of socially responsible investing (SRI) and corporate social responsibility (CSR). The term 'ESG' was formally coined in a 2004 United Nations report titled 'Who Cares Wins', which argued that embedding environmental, social, and governance factors into capital markets would lead to better outcomes for societies and investors alike. Over the subsequent two decades, ESG grew from a niche ethical screen to a mainstream investment consideration.
In India, the regulatory push for ESG has been led by SEBI. In 2012, SEBI mandated Business Responsibility Reports (BRRs) for the top 100 listed companies. This was upgraded to the Business Responsibility and Sustainability Report (BRSR) framework in 2021, requiring the top 1,000 listed companies by market cap to report against a standardised set of ESG metrics from FY2022–23 onward. SEBI further introduced BRSR Core in 2023, requiring assurance on key ESG metrics for the top 150 companies from FY2023–24.
NSE Indices Limited manages the Nifty 100 ESG Index, which screens Nifty 100 stocks based on ESG scores provided by third-party data providers, excludes companies in sectors such as tobacco and controversial weapons, and reweights remaining stocks by their ESG score within their sector. Several AMCs have launched ESG-themed mutual funds and ETFs benchmarked to this and similar indices.
The 'E' in ESG covers carbon emissions, water usage, energy efficiency, and waste management. The 'S' encompasses labour practices, supply chain standards, employee welfare, and community impact. The 'G' element — governance — includes board composition, executive compensation, audit quality, and related-party transaction transparency. In India, governance has historically been the most scrutinised dimension, given high promoter ownership structures and episodes of tunnelling and fraud at companies like Satyam, Fortis Healthcare, and Zee Entertainment.
Critics of ESG investing raise concerns about data quality, inconsistent ratings across providers, greenwashing by companies, and the absence of a clear causal link between ESG scores and financial returns in all market conditions. Proponents argue that over long horizons, companies with strong governance and environmental stewardship face fewer regulatory penalties, reputational crises, and stranded-asset risks — all of which ultimately affect fundamental value.