Imagine you are the owner of a company; would you like the company to be flash in the pan - that exists for a year or two before flameout? Or would you like to own a long term successfully run business that is capable of withstanding the test of time?

The answer is obvious, while some of us risk takers may prefer the former model, most would prefer to own a sustainable business with a long term growth model. Each sector tends to have that one company that stands out for being there for a very long time and scaling up with time. Look at say FMCG, or automobile or banking, you name the sector and you will have one or two companies that stand out.

Becoming an owner of these companies is easy! Yes you read that right, it is quite easy. All you need to do is buy their stock on the stock market! While it is nice to be the owner of a large company, imagine if you bought that same stock 20 years ago, and what your wealth would be now…. Sustainable businesses built on strong foundations, will always create wealth for the owners - and help them meet their financial goals.

So how does one identify these companies, these sustainable, consistent winners. Again the answer to this is simple – a 3 letter acronym called ESG.

What is ESG? 
ESG stands for Environmental, Social and Governance. Any company which is doing well today and will sustain this ‘doing well’ long in the future will be mostly compliant with ESG. Let us break it down further for you. Starting with E.

The E of ESG
E stands for the Environment. Not the business environment in which the company operates but the environment as in the use, preservation and conservation of natural resources. “How can this have an impact on the stock?”, you ask and rightly so.

There are 2 answers to this question. One is the ‘Regulatory’ answer, that with India getting more serious about climate change and pollution control than ever before, a company that has the best practices when it comes to the conservation of the environment around its factories and places of work is less likely to be impacted with regulations that could force plant shutdowns etc. as compared to those which do not regard the impact their business has on the environment.

For the other, and more important answer, one simply has to look at one’s children. Do we want an Earth where our future generations are moving around wearing oxygen masks and frowning upon their ancestors who didn’t take care of the environment? Or a clean and green world where they can breathe in pure air and feel invigorated by it, thanking their ancestors for protecting the environment? The answer to this one is very obvious.

Hence the need for companies to be more environment conscious, not for the balance sheets of today but to maintain the balance of nature for tomorrow.

The S of ESG
S stands for Social. Every business employs people. Large businesses often have thousands of employees working for them, from the factories to the head office - each and every employee contributes to the success of the organization for which they work. Thus, it is very important to look after their health, safety and well – being. Successful companies do this very well. From well designated safe zones in factories, to health checkups for all employees - there are multiple initiatives taken to ensure employee health and safety. Social also goes beyond the work hours and the quality of work, but also extends to the quality of life for the employees. It includes the benefits given to each employee. The male – female ratio etc.

The S doesn’t end with just the employees. It has a much larger role to play than that. Social also encompasses and affects you, the minority shareholder. How does the company treat the minority shareholders? On par with those owning say 80% sold their shares to a foreign company at a premium, leaving the minority shareholders to fend for themselves. A sustainable business is the one that has complete parity in treatment of those who may own 80% of the company or 0.008% of the company.

Again, the S doesn’t end with this too, but also looks at what the company is doing for the Society at large. Is the CSR budget a name only? Or does the money actually get spent towards improving the society in which the company operates? Does the money go to a shady foundation? Or one that sets up schools, colleges and hospitals or even toilets to provide basic sanitation for uplifting the society?

These are some of the questions which the best companies in India answer to the affirmative.

The G of ESG
G is for Governance. This is the base, the foundation by which the company is judged. The standards of Governance and ethics by which the company is run. Even for the Quantum Long Term Equity Value Fund, the governance standards of a company play a crucial role, other than valuations, when it comes to selecting a stock. By governance standards we do not mean mere check boxes on audits and following GAAP standards, but walking the talk when it comes to financial disclosures and implementing the best practices in word and spirit. History (and stock markets) are replete with examples of companies who claim the high moral ground, but on closer look fail the governance test. Large financial institutions in the past have also fallen prey to the temptation of cooking books, which sooner or later will eventually be found out.

As more such incidents come to light, the tighter SEBI and the Regulators are going to get for all companies. The companies we choose will have the highest standards of governance, so no matter how tough the Regulator gets, these companies - and you as their investor – have nothing to fear.

The Last Word
One of the challenges that Corporate India has to contend with and will continue in future (which is great for investors by the way) is the fact that regulations are going to get stricter and adherence to them is going to get tougher. Be it environment norms or impact on society or actual accounting bells and whistles. The Regulators are going to come down hard on companies who flout the rules and penalize those who are out of line.

If the company adheres to the highest standards of E, S and G then there is a three-fold advantage of investing in those companies.

1. Since the company is already adhering to the highest standards of ESG possible in their field - they do not need to incur any additional costs and are on a safer wicket if the Regulator tightens norms.
2. Since tighter regulations may force non ESG compliant companies to modify or even shut down operations - the ESG compliant company can take advantage of the situation to increase market share while other non – compliant companies struggle.
3. Being ESG compliant enhances the reputation of the company multi-fold – not only amongst investors – but customers and stakeholders alike.

“Good ethics is good business” is an adage we firmly believe in and companies that focus on the Environmental, Social and Governance aspects of the business get a thumbs up from us.

How do you, as an investor, identify and participate in the success of these companies? Wait for Part 2 of this article!

Product Labeling
Name of the SchemeThis product is suitable for investors who are seeking*Riskometer
Quantum India ESG Equity Fund

(An Open ended equity scheme investing in companies following Environment, Social and Governance (ESG) theme)
• Long term capital appreciation

• Invests in shares of companies that meet Quantum’s Environment, Social andGovernance (ESG) Criteria
Quantum Long Term Equity Fund
Investors understand that their principal will be at High Risk
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.