ESG funds: A step towards sustainable development

ESG funds or investing is just another use for ‘sustainable investing,’ whereby one invests in companies that have a sustainable and holistic way of doing business. Let us break down the E, S, and G factors:\

Environmental (E):

This factor affects the environment and considers the practices a company has in reducing carbon emission, having sound disposal of wastes, with much emphasis on the conservation of energy and water. Essentially, laboratory attention that is paid to a greener environment.

Social (S):

This parameter looks at the well-being of the staff within the company and society as a whole. An S-compliant company shall care for factors like welfare of employees, gender equality, pay parity, and would contribute periodically towards other relevant social causes.

Governance (G):

It lays emphasis on compliance with the regulations, redressal of grievances, robust whistleblower policies and ethical practices, and a firm structure of internal controls which protects it against wrong practices.

What are ESG Funds?

Environmental, Social, and Governance, or, in other words, ESG funds. These are a type of mutual fund that dealing investments in companies which have affirmations of being in compliance to ESG parameters and focusing on sustainable development. It is invested in a particular theme or sector like renewable energy, healthcare, technology etc.

ESG funds are those funds that only invest in companies that readily display concern for the environment, show social responsibility, and are run by a clean and robust corporate Governance System. These funds give decent financial returns with a positive impact on the environment.
Now, coming to the Indian context, it can be said that though ESG Funds are new to the market, they are pretty in demand. As of now, there are 9 ESG funds in our country. The AUM is as big as Rs 9,986 crore for sure.

Types of ESG Mutual Funds

There are numerous ESG mutual funds, all of which possess their distinct style of investment. A few of them include:

• Exclusionary Funds: They exclude investing in particular sectors or products, for instance, tobacco, weapons, and fossil fuel companies.
• Best-in-Class Funds: Invest in companies having the best ESG ratings within the industries.
• Thematic Funds: The category involves funds invested in companies focused on some certain sustainability themes. For example, clean energy, gender diversity, or water conservation.
• Impact Funds: Impact funds are funding products that endeavor to create positive social impact while giving higher returns to the investors.

Why ESG Funds?

Nowadays, investors have come to realize the importance of ESG parameters in making investment decisions. Some major reasons to the investors from investing in such funds are:

• Positive Impact: It results in one making a positive difference in the economy through ESG funds. This is because it results in investment in a company that has got good ratings in ESG factors.
  Portfolios diversification: It reduces the exposure to the traditional risks. It’s because it invests in companies after considering the environmental, social and governance factors.
• Risk Management: Companies with strong ESG practices are often better equipped to manage risks related to environmental regulations, social issues, and governance failures. Investing in these companies can potentially reduce the risk of negative financial impacts from these factors.
• Long-Term Performance: There is growing evidence that companies with strong ESG profiles tend to perform well over the long term. Therefore, this can be attributed to factors such as operational efficiency, innovation in sustainable technologies, and better relationships with stakeholders.

Difference between ESG Funds and traditional Funds

How and where do ESG Funds invest?

ESG Mutual Funds are those thematic mutual funds invested in socially responsible companies. Wherein the investment process includes evaluation of factors like their environmental, social, and governance practices. Moreover, ESG funds invest in organizations that are ESG compliant, focusing on sustained growth. The companies have business models straddling sustainability requirements and, aid in the creation of wealth for investors through the long term. In line with the investment strategy, the fund can invest across market capitalizations and sometimes in overseas stocks, adhering to the ESG framework.
The fund manager of the ESG Funds does not invest in companies whose products and services have socially and environmentally harmful outcomes.
Some of the ESG mutual funds in India are the ICICI Prudential ESG Fund. Wherein one invests in local and global companies that have high ESG scores. However, the Kotak ESG Opportunities Fund merges exactly the very same ESG score with its indigenously developed Business, Management & Valuation approach.
This can be forthcoming: ES-G has focused on finding responsible organizations with sustainable growth. But it does not come at the cost of the other major focus area: to help any investor build wealth. Neither of these two factors would be compromised in the evaluation.

How Have ESG Funds Performed?

The in-category funds’ historical performance is usually judged by looking at their past performances. The problem associated with ESG funds is that, as a category, they are very new to the market and investors. Hence, there might not be fund performance data to check for historic performances.
The most followed and benchmarked Index for ESG Mutual Funds in India, however, is the NIFTY 100 ESG Index, which actually can tell us a story of how this has performed in the past few years. Infosys Ltd., Tata Consultancy Services Ltd., HDFC Bank Ltd., and Titan Company Ltd. constitute this Index.

Moreover, to understand more about ESG funds enrolling yourself in B. Com/ M.Com courses that will help you to create the right understanding of it. Centre of Distance and Online Education, Manipal University Jaipur offers UGC entitled Online B. Com and online M.Com courses for all those who are interested in learning accounting and finance. Candidates enrolled in Manipal University Jaipur’s online Commerce program can take advantage of the program’s flexible schedule, excellent faculty, and extensive course material.