This research was inspired by John Mackey and Raj Sisodia's Conscious Capitalism Theory. It aims to look at 4 economy driving industries to understand the financial performance of ESG focused portfolios vs non-ESG focused portfolios.

1. ESG consciousness or financial performance? – Research says you can have both.
In the last decade, ESG as an idea has increasingly attracted attention from business leaders as well as valuers,
stakeholders, and investors, globally.
Umpteen articles on the internet say that, in the current age, ESG is arguably the only multi-faceted solution to
the multitude of problems faced by businesses on the stock market.
While the popularity of ESG spiked my interest, it was first important to distinguish between ESG and a similar
concept that I was aware of since high school – CSR.
While ESG (coined in 2004) stands for Environment, Social and Governance risks that investors prefer assessing,
in addition to financial factors, before making an investment decision, CSR is self-regulating model that helps a
company be socially accountable to its stakeholders.
Another interesting term that I came across was Conscious Capitalism which, in essence, complements ESG. It
is a philosophy created by John Mackey (CEO, Whole Foods Market) and Raj Sisodia to propose that businesses
that serve interests of all stakeholders and the environment are not only ethical but also financially efficient.
The concept was backed by a research to prove the same.
Busting the Myth
ESG is a holistic idea and investors suggest that it should be integrated with the business while CSR is usually a
voluntary activity that could be completely unrelated to the business.
ESG measures progress by demanding metrics and is a more precise assessment of a company’s actions.
For instance, businesses in India need to compulsorily make a 2% yearly investment in CSR activities. This action
may not qualify as ESG. ESG is more to do with improving the society while improving business operations by
reducing the carbon footprint, corruption practices, bribery, and the likes.
Research on ESG
A focused research across industries to understand the importance of ESG in detail helped me imbibe certain
ideas that I believe are essential for manoeuvring any business in the present-day environment.
The research spans across 56 public companies and 4 economy driving industries – Healthcare, Consumer,
Mining and Oil & Gas.
ESG risk scores1
and 10-year daily stock prices2
were used to screen companies at first. ESG risk levels are
classified into low, medium, high, or severe – wherein low risk scores indicate best in class ESG practices and
severe risk scores indicate worst in class ESG practices.
The risk scores were utilized to bucket companies into ESG focused/Non-ESG focused portfolio. Post this, daily
log returns were calculated using daily stock prices (2010–2020) of each company. Log returns are
continuously compounded and were summed to arrive at the total return of each portfolio.
The total return figure is the most important metric in the research – it compares the performance of ESG
focused portfolio with Non-ESG focused portfolio.
In the Healthcare, Consumer, Mining and Oil & Gas Industry, the total returns of ESG focused index outperformed
the Non-ESG focused index by 17%, 14%, 68%, 57% respectively. Refer Figure 1
1
ESG risk scores sourced from sustainalytics.com (yahoofinance.com)
2
10-year daily stock prices sourced from yahoofinance.com

2. Figure 1: Total Returns of ESG and Non-ESG index - All industries
Owing to the unique nature of these industries, the outperformance of ESG indices were backed by some more
thought-provoking revelations and reasons.
From Nov 2019 to June 2020 (ongoing COVID-19 pandemic), the ESG index of consumer industry
outperformed the Non-ESG index by 14.5%. This explains that ESG focused companies may be resilient
even during times of crisis.
Mining sites are infamous for poor social practices such as child labour. Despite this major drawback,
the ESG focused index gives positive returns. This may be explained by the low social and
environmental risk scores in the ESG focused portfolio of the Mining industry.
Oil & Gas is infamous for poor environmental practices, such as oil spills in the sea, possibly explaining
the lack of companies in the low risk category and rationalizing the negative returns in both portfolios
of the industry. Hence, ESG focus may influence risk perception, reducing negative returns.
ESG analysis can help be cognizant of and possibly mitigate the potential risks of a business. Besides that, an
ESG focused business stands at a clear advantage by making societal as well as financial impact.
But…
How does the effect of ESG get reflected in its portfolio returns?
For that, a company must go through a structural transformation and make ESG a strategic priority.
How can a business start with its ESG transformation?
1. Strategy: It is necessary to realise that investors prefer ESG focused businesses and so higher ESG risks
would affect the business valuation negatively. Most analysts valuing a company with a high/severe
ESG risk score would consider adding a sustainability risk premium to its discount rate before valuing
the business.
2. Blueprint: Reporting frameworks such as Sustainability Accounting Standards Board (SASB), Global
Reporting Initiative (GRI) and International Integrated Reporting Council (IIRC), provide raw materials
that companies can rely on to get a deeper understanding of issues that need to be recognized,
addressed and reported. The management must also make objective long-term goals and give yearly
updates on the same to their stakeholders.

3. ESG in India
The ESG concept is at a very nascent stage in India. Currently there are only three ESG funds in India – SBI
Magnum Equity ESG, Quantum India ESG Equity and Axis ESG.
ESG requires data, regulatory compliance, and transparency but India as a country has little awareness of ESG.
India needs a collective effort of regulators as well as large, medium, and small sized companies to give a true
view of their company’s ESG operations.
The Irish law in 2017 made regulations for its companies to make annual non-financial disclosures. Following
this, developed countries like USA and developing countries like India have made similar regulations.
SEBI in November 2019 made it mandatory for the top 1,000 listed companies to come up with their yearly
business responsibility report.
These actions are a clear indication that the world is preparing for better ESG practices and that there has never
been a better time to integrate this concept into businesses.
ESG facts amid the COVID-19 pandemic
➢ The S&P 500 index lost about 30% of its value in the first quarter of 2020. The average ESG fund,
however, fell only 12.25% during the same period.3
➢ MSCI US index dropped by 2.45% while the MSCI ESG index rose by 0.32% during the same period.4
➢ Nifty 50 index dropped by 9.42%, Nifty 100 index dropped by 9.03% and Nifty ESG index dropped by
only 4.43% during the same period.5
These facts indicate that ESG focused companies stand at a clear advantage even during times of crisis.
Post the beginning of the COVID-19 pandemic, companies like Bain & Company, Edelweiss Broking Limited and
the likes also shared their views in favour of the ESG concept.
To conclude,
ESG focused companies have the potential to generate alpha as well as reduce negative returns. This makes ESG
an enormously powerful tool for not just businesses and investors but also for the economy and the ecosystem
at large.
This leaves every professional with the responsibility to educate more people on the topic and integrate ESG
into their businesses in the right manner.
With a sincere hope that everyone reading this is as intrigued by ESG and conscious capitalism as I am, I would
like to end this article with one last line:
‘’Operating under the conscious capitalism model will show that businesses are the true value creators that can
push all of humanity upward for continuous improvement’’ – John Mackey.
3
Data sourced from Bloomberg.com
4
Data sourced from MSCI.com
5
Data sourced from nseindia.com