The European association promoting Sustainable Finance (Eurosif) in 2014 has defined ESG factors as one of the driving factors for asset managers when it comes to investment in companies - ‘‘The explicit inclusion by asset managers of ESG risks and opportunities into traditional financial analysis and investment decisions based on a systematic process and appropriate research sources’’. Various investment firms have started taking into account the ESG factors before making investment in any organization and inclusion of ESG integration factors in investing strategies have become a distinct service for fund managers.
It seems reasonable to say that ESG investing holds a significant potential, perhaps even greater than the promise that active investment formerly held. An investment approach known as active investing aims to outperform the market index on a risk-adjusted basis. As a strategy, it incorporates both technical analysis with Charles Dow's early influences and fundamental analysis, which Graham and Dodd (1934) supported. ESG investing promises a better world, whereas active investing just means the expectation of positive risk-adjusted returns. We will concentrate on how ESG impacts investment management in this study. Is it actually distinct from active investing in the traditional sense? Fundamental analysis is perhaps the more crucial of the two fundamental investment strategies. Chugh and Meador (1984) identify hints about what might be significant in basic investment from a study of financial analysts. They uncover that analysts place a premium on a company's long-term economic and financial performance and favor stock-specific information over broad economic forecasts. Additionally, they place a great importance on the effectiveness of management and strategic planning.
Upon comparison of fundamentals of ESG investing it is observed that the quality of management is strongly related to corporate governance. Furthermore, it takes a lot of strategic planning to accommodate the concerns of social and environmental interest groups. Despite the fact that ESG investing places a lot of attention on non-financial aspects of business performance, it actually acts as a stock selection filter.
Author: Brijansh Pandey