Sumit Kumar is a quant and investment analyst and Fintech professional working in Capital Market and Financial Technologies for the last 17 years. Currently Sumit works for THE CERES GROUP (https://theceresgroup.com) as Senior Director( Capital Market) leading Capital Market, Risk , Fintech, Derivatives and Quantitative Finance, ESG Integration Consulting Practice. Sumit is a SME of Systems like Calypso, Murex, Charles River, Risk Metrics, and so on. He is a regular speaker on many financial topics, but has a particular interest in ESG Integration in the investment world.
What does “ESG” mean? The term stands for Environmental, Social and Governance referring to three central factors in measuring the sustainability of an investment. For example, in a particular investment situation, what are the governmental implications that could directly or indirectly affect the sustainability and environment of the area or region in which the investment is taking place (for example, investing in a new oil pump complex in the DRC)?
“For the past few years, there has been growing interest in ESG investments. Driven by different factors like the shifting global focus, the changing investor profiles, and the development of more advanced data gathering and processing, in addition to studies that showed the positive correlations between ESG performance and firm value (e.g., Fatemi, et al., 2018) and ESG criteria and corporate financial performance (e.g. Friede, et al., 2015), ESG has now grown to become part of mainstream investing.”
The logic is simple: companies that put an especial focus on ESG-sensitive investing tend to do better. At the heart of ESG investing is the simple concept that companies have a greater chance to succeed and deliver strong results if they create value for all their shareholders – employees, customers, suppliers and wider society including the environment – and not simply the company owners. Accordingly, ESG investments now account for one-third ($17.1 trillion) of the total $51.4 trillion US assets under management, showing a 42% increase from 2018.
From a global perspective, there are many ways to incorporate ESG principles into an investment calculus. The main applications tend to be ethical/values-based investing, integrated ESG and sustainable/impact investing, each of which Sumit has unique expertise in advising upon.
Sumit Kumar explains,
“ESG (Environmental, Social, and Governance) investing, also known as “sustainable investing,” is a strategy used by investors to determine firms that one may likely invest in. This type of investment is based on the premise that certain environmental, social, and corporate governance factors can impact business, and therefore, by looking into these factors, investors are given a more holistic view of firms, which consequently can potentially mitigate risk as well as identify opportunities for growth.”
There has been a shift in global focus around sustainability, with growing pressures from different sectors such as the government and regulatory bodies, capital markets, and consumers to address these issues and perform better, as different societies are taking more of an interest in how their companies perform according to a sustainability standard.
Sumit Kumar explains, “It should be noted that these global sustainability issues are not limited to environmental issues like climate change, deforestation, and air and water pollution, but also include social issues like fair labor practices, safety, and wellness, and diversity. Likewise, in some parts of the world, poverty and starvation also remain to be a big social issue, including income disparity. Meanwhile, global sustainability issues also include corporate governance issues like privacy and data security, corruption, and whistleblowing practices. The 2008 financial crisis, for instance, proved how the lack of governance can cause a collapse in the financial market. These global sustainability issues have inherent risks that are different and more complex, which prompts the modern investor to reevaluate the traditional investment approaches and turn to the ESG framework to incorporate such risks and be able to respond to them appropriately.”