Planet Earth II,
Life and so on. On IMDB, these tend to be rated 9+ out of 10, which is exceptionally rare and good. The common theme is not just that they are each about the beautiful planet we call our home, but also that the narrator is Sir David Attenborough. This gentleman, who you probably already know about, is 95 years old. Even at his age, you may not find a person more passionate and energetic about saving the environment.
In 2020, he featured extensively in an eponymous documentary subtitled
A Life on our Planet. Some of the visuals he exhibits, of himself having visited parts of the world from over half a century ago to now – they are shocking. Substantial forest cover has vanished, as have countless species of animals, plants and insects living in them.
A few particularly mind-blowing statistics he mentions: 1) Human beings cut down over 15 billion trees each year. Since the beginning, we have cut 3 trillion trees in total. This is 50% of all the trees on the planet. 2) 90% of all large fish in the sea are gone, due to overfishing. As a consequence, a significant part of the marine ecosystem is dead. This has impacted the ocean’s ability to absorb carbon dioxide, leading to warmer climates, and erratic seasons. 3) In the last Ice Age, when global temperatures were only 4 to 7 degrees cooler than today, the city of Chicago was under 800 meters of ice (like an ice mountain). With rapid industrialization, we are now racing in the opposite direction – on track to become 3 to 4 degrees warmer than baseline, and already about 1 degree hotter than what is ideal. Every half-a-degree increment now could be devastating. Is this who we want to be? Is this the legacy we wish to leave behind for the future?
In the world of investing, ESG has become quite the buzzword. What is it? ESG stands for Environment, Social & Governance. It involves preferring investments in companies that treat the environment well or at least do not harm it (such as via climate change, effluents, carbon emissions), that treat their employees and stakeholders well (social, diversity and inclusion), and are not involved in frauds and trickery (governance).
ESG has put many proponents and naysayers at loggerheads. Is ESG for real, or is it just a fad? That depends on the objective. From an environment perspective for instance, if one is really keen on saving the planet, then ESG is a potent tool in the hands of such a rescuer. Prof. Ashwath Damodaran, the foremost valuation expert, picked on ESG in his blog last year. His posited several arguments – that ESG adopters were doing it for their own benefit (i.e. to peddle more products), that there is limited data and correlation between ESG and returns, and that value systems differ across people among other things. These are valid of course, but the answer may not be to completely ignore ESG either.
So, how do investors incorporate ESG in their investing? For some investors, while ‘G’ has always been important, ‘E’ and ‘S’ factors are also beginning to gain prominence. It is preferable to apply these layers for all investments, rather than just for specific ESG-labelled funds. Working with external consultants and experts to further one’s understanding of ESG trends can help too. Even so, this is not an easy path. Doing the ‘right thing’ could entail letting go of near-term investment returns in lieu of ESG improvements. Is this an easy call? Absolutely not.
However, as fundamental investors, one would expect that in the long run, there is an outperformance bias towards companies that perform well on ESG factors. Note that this is not as simple as backing companies with high ESG scores. Because for one, scores vary a lot across various data providers. And two, many companies in India do not disclose sufficient data about their environment or social footprint. In fact, in our experience, just providing better disclosures itself can lead to ESG ratings upgrades.
Some practitioners also completely shun certain sectors. Defence is one example. Surely a company that manufactures explosives aimed at civilians is a no go. But how about one that creates defence systems for protecting its country’s borders? You can now appreciate how several grey areas exist. But this is also where ample opportunities lie. Instead of simply ‘excluding’ sectors and companies due to poor scores, it would be important to engage with them, and guide them towards better disclosures and best practices. Is this all perfect yet? Far from it. There is a lot to be learned, but moving forward is imperative – in a space that is itself evolving very rapidly.
In his book
How to Avoid a Climate Disaster, Bill Gates says there are just two numbers we should be concerned with. 51 billion, and zero. What are these? 51 billion tonnes is the amount of greenhouse gases we emit into the earth’s atmosphere each year. And zero is the number this has to reach. While no one person or entity is enough to effect this sort of change, if we each do our bit, then collectively we can succeed. It is still not too late to contribute. But we cannot delay any longer. Sir David Attenborough reserves the last word here, “This is not about saving our planet. It is about saving ourselves.”
(The author, Mahesh Ramasubramanian, is Vice President and Investment Strategist, DSP Investment Managers. Views are his own)