ESG funds (Environment, Social and Governance)
ESG criteria are a set of standards for operations of a company
Companies that follow ESG norms usually have a lower risk
In recent times, ESG funds are becoming more popular among investors. Read to know more about this ESG and ESG funds.
What is this ESG (Environmental, Social, and Governance)?
ESG criteria are a set of standards for operations of a company that help investors screen companies and potential investments that score high on these three non-financial parameters. Socially conscious investors increasingly prefer an environment-oriented company that has high corporate governance standards without compromising financial returns.
What are the ESG funds?
ESG funds are portfolios of equities and bonds that integrated environmental, social, and governance factors into the investment process. ESG fund includes securities that score high on sustainability and exclude companies that perform poorly on pollution, labor relations, and management practices. Even sovereign government bonds with poor records are excluded.
IT means equities and bonds have passed stringent tests to prove its sustainability or governance regarding its ESG criteria. That is why ESG investing is also referred to as sustainable or responsible or impact or socially responsible investing.
Understanding ESG Criteria
A corporate environment, social and governance orientation involves several factors while carrying on the company’s operation. Investors who go for value-based investments seek companies whose vision and products are oriented towards ESG criteria.
Environmental criteria look for how a company operates with concern towards nature. It includes factors like energy used in production or operation, carbon footprint and emission control, conservation of natural resources, waste management, and treatment towards animals. Companies must comply with the pollution standards as well as conservation rules and regulations of the government. These days, companies bear financial costs for non-compliance with environmental regulations.
Under the Social criteria, the company must produce products or services that influence society positively. It involves the company’s relationship with employees, suppliers, customers, and the communities where it operates. Corporate community-orientation involves socially responsible initiatives and spending on social causes and community development involving employees too.
Governance means to conduct business ethically. It deals with audits, executive pay, leadership, internal controls, and company shareholder rights. In this regard, the investors and stockholders may want to know whether the company applies accurate and transparent accounting methods and involves shareholders to vote in vital decisions taken in annual general meetings or other company meetings. The corporates with regulatory issues have to pay fines for the non-compliance of statutory obligations and governance standards.
The Indian mutual fund industry and ESG funds
Presently global pension funds and other substantive investors are directing money to ESG investing. Therefore the Indian mutual fund industry too, has rolled out new funds based on ESG investing for investors. At present, ESG funds include SBI Magnum Equity ESG, Quantum India ESG Equity and Axis ESG following the ESG investment strategy in India. However, other fund houses such as ICICI Pru, DSP, Aditya Birla, Kotak, and BNP have also submitted draft offer documents with SEBI and are waiting for approval.
Why investing in ESG funds vital?
Globally about $2.96 trillion has been invested in funds that focus on ESG. Only investors can force the corporate world to behave responsibly from a social, environmental and governance perspective. Moreover, climate change and changes in societal preferences and governance issues pose risks to corporate earnings and investors in stocks.
Companies that follow ESG norms usually have a lower risk of losses due to these factors.
Research has shown that sustainable funds perform better than non-sustainable ones. It is because sustainable companies better manage risks over contentious issues like carbon footprint, face lower regulatory or societal risks than other defaulters, and their shares would be less volatile over time with increasing value for investors in the long run.
In India, the concept of ESG is still new and other than the top 100-150 companies that share ESG related data by market capitalization, minimal information is available on ESG firms. Fund houses formulated their methodologies to screen for ESG and procure data. You may invest in ESG funds for its ethics. However, for returns, you better talk to your advisor about the track record.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.