Green Money Moving Towards Greener Stocks – Are Your There !

Globally ESG funds are receiving greater allocation. These funds now mange assets worth Trillions of Dollar, from hundreds of billions of Dollars, just few years earlier. According to various estimates, the amount may soon cross $50 Trillions, in few years from now.  Indian financial markets are seeing traction in the emergence of ESG funds. Major   players like ICICI, Axis, SBI Magnum Equity HSBC, Invesco, Aditya Birla Sun Life, Kotak,  Mirae etc have launched their ESG funds.

What is the direction? Where is the money moving?

Increased allocation in ESG is not random but are being caused by structural policy development in Europe and US.  To understand the developments, we need to look around the climate movements in different parts of the Globe.  In Germany, elections are being fought with climate as one of the top items in the manifesto of politicians. In Europe, Climate change is one of the top priorities in the list of citizens. United States under the leadership of Joe Biden has reinforced commitment to Paris climate agreement and has aimed to cut the greenhouse gas emissions substantially by 2030. Japan is also committed to get carbon neutral over a period of time.

Finance Minister from G7 Countries have unanimously agreed that Banks and Corporation should disclose climate related risk for ensuring financial stability.

Markets have closely followed the recent example of climate related bankruptcy.  In 2017, major wildfires in California destroyed lakhs of acres of forest land and led to the death of many people.  Later investigation revealed that Pacific Gas and Electric (P.G. & E.), one of the biggest utility companies in US which was supplying gas and electricity to 5 million household, was the major cause of the fire. Potential liabilities ran into billions of dollars, forcing it to file for Chapter 11 bankruptcy

Example of Pacific Gas portrays the risk corporations are carrying, which cannot be assessed from their financial Numbers. In years to come, Financial Markets may face unprecedented stability risk, which may arise from the potential climate disruption and extreme weather.  Markets are increasingly getting sensitive to sustainability issues and changes are visible in the investment decision as large sum of money is moving towards the ESG basket. Large sovereign funds, institutional investors and financial communities are increasing looking beyond the Balance Sheets, trying to understand investee strategies for reducing carbon footprints, kind of climate risk embedded in the investee business, energy requirement etc. Globally non-financial parameters are emerging as important matrix for investment decision.

To support the Investors, in facilitating better investment decision making, Financial Market Regulators are mandating the standards for sustainability reporting.  In India SEBI has issued the guidelines for BRSR. The new guidelines will make the Indian sustainability disclosures at par with the Global peers. HDFC has become the first Indian Company to report BRSR, ahead of its mandatory requirement by SEBI.   

Globally there is a pursuit to make corporate communication in line with investors expectation. This is evident from the fact that IFRS foundation has appointed Former European Central Bank President as head of the advisory group of International Sustainability Standards Board (ISSB). ISSB will be responsible for developing globally accepted sustainability standards. Companies will have to report uniform non-financial matrix for disclosure, similar to financial uniformity as laid down by IFRS.  Seriousness of the efforts can be understood from the fact that Group has representation of former chair of the Bank of International Settlements, former deputy managing director of the International Monetary Fund, including Mr Nandan Nilekani from India. Further, many of the members of the Financial Stability Board (FSB) have implemented the sustainability standards in their countries, for addressing the investors challenges in assessing the climate risk that may pose challenges to their investment in future.  

Climate is the highest priority in all those countries which matters in the financial world. Politicians, Financial communities, Market Regulators, Standard Setters, all are taking climate seriously. This is evident from the quantum of money moving towards ESG. Money will move towards the companies which have lighter carbon prints and are relatively insulated from climate risk apart from the quality of business and growth potential. It will not be unwise to estimate that Green Money is Moving Towards Greener Stocks. Those who have investments in low carbon footprint companies, will stand winners in times to come.

Bureau Galactik Views

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