Explained: What is ESG Fund?
ESG Funds are the latest fad in India! It's a market worth trillions of dollars. So, what are ESG Funds, exactly?
If we have learnt anything in 2020, it is that everything is unpredictable.
Thus, analysing a business only on the basis of its financial metrics won't suffice. It should be robust and armed to bear and survive the most unpredictable situations. It should be sustainable.
Ignoring sustainability and the longevity of a business can impact its stakeholders and investors. But, how does one measure a variable which is qualitative in itself?
Environmental, Social and Governance Framework
This is where the Environmental, Social and Governance (ESG) framework comes into the picture. Any company which is doing well today and hopes to sustain this progress in the future will be mostly compliant with ESG. Not just financially sustainable, but environmentally sustainable too.
And to ride on this increasing popularity of “high ESG” companies amongst investors, ESG funds are coming up.
ESG funds are mutual funds that invest in equities and bonds of companies. Other than the financial parameters, environmental, social and governance factors are also considered. Other factors like management, culture, people, ethics profile etc. are also tested under ESG criteria.
Anyone having an inclination towards environment concerns and investing in long-term sustainable companies can invest in these funds.
Today, companies focus more on the profit-making part of the business, neglecting the impact it has on the environment. Capitalism? Maybe. Good news is that this is in for a change.
Globally there are 3,300 ESG funds with $40.5 trillion in Assets Under Management (AUM). The numbers have tripled in just one decade. ESG is picking up in India. India has 3 ESG schemes with INR 45 billion in Assets Under Management (in just 15-months) and is growing.
Here’s how Nifty ESG has fared against Nifty 100 index from Oct 2018 to Oct 2020:
SBI Magnum Equity ESG, Axis ESG and Quantum India ESG Equity are three schemes active currently. At least 5 more schemes are lined up.
As ESG funds gain momentum in India, companies will be forced to follow better governance, ethical practices, environment-friendly measures and be socially responsible. Chemical companies having untreated waste, companies having high water requirement and improper waste management are on the verge of losing big time.
Regulations, norms and acts are bound to increase in the near future keeping in mind the Environmental, Social and Governance verticles. Companies can also adapt to these factors without any significant costs. Companies which are ESG compliant will have a better reputation and will see higher investor interest.
After a long time, economic incentives are working in favour of social issues. A green planet, with greenery in your bank account. - a future to root for, isn’t it?
By: Yash Gandhi
Thousands of readers get daily updates on WhatsApp! 👇 Join now!
Want to know what ESG exactly stands for? Here:
E (Environment Empathy): Climate change is real. Pollution levels have increased multifold, and it’s just getting worse. Needless to say that a majority of this comes from the industrial sector. Hence, companies need to be mindful of the environmental damage that they are doing and take corrective action (one such action by Hindalco was covered by us in another piece).
S (Social Responsibility): Corporates have become like countries. They have their own set of social values, their own resources and their own vision. These pseudo-countries have employees and other stakeholders as citizens. Hence, ensuring work-life balance, employee safety, no gender discrimination, LGBTQ-friendly environment are some of the factors companies in recent times are paying attention to. Moreover, Corporate Social Responsibility is another such factor being used to determine what a company is doing to benefit society.
G (Corporate Governance): Be it in managing their finances, disclosures, following norms and regulations or transparency, ethically run companies are the best ones. Moreover, from an investor’s perspective, companies which show high governance are safer than those that fall on the other side of the table. Honesty and Integrity matter.