What are ESG Funds? 5 Things Every Investor Should Know

From climate change to the current pandemic, there are several alarming reasons for us humans to introspect how we live our lives closely. While these can be considered natural events, we sure have played a significant role in making them a reality.Not just how individuals live their everyday lives but even how businesses across the world conduct themselves need to be closely evaluated. This has led to the creation of the ESG (Environmental, Social, and Governance) criteria, which focus on the sustainability and longevity of businesses.There has been a growing trend among large investors and pension funds across the world to invest in such ESG compliant businesses. To keep up with this global trend, the Indian mutual fund industry has also introduced ESG mutual funds.Take a look at what ESG investing is and whether these funds are right for your investment-

As mentioned above, ESG is a type of stringent non-financial business rating criteria that assesses companies based on environmental, social, and governance factors. The companies that are currently doing well and would like to keep up the momentum in the future will mostly be ESG compliant.While the ESG rating criteria have been around for some time, the growing awareness about climate change and the current pandemic has made it a vital aspect of how investors assess companies. The ESG investing approach is already popular among larger investors and even pension funds globally, and India is also steadily getting in on the trend.

The ESG compliant companies comply with all the environmental, social, and governmental benchmarks of these criteria. A detailed breakdown of ESG will make it easier to understand what these rating criteria are about-

• Environment The environmental aspect of the criteria focuses on the conservation and preservation of natural resources. In other words, it assesses companies based on their practices towards protecting the environment.
  Apart from the regulatory requirements, companies should also adopt greener alternatives to ensure sustainability and longevity.
• Social The social aspect focuses on how a company treats its employees. A socially responsible company is highly concerned about employee safety and takes adequate measures to protect their employees from occupational hazards.
  Fair treatment of employees from all genders, CSR initiatives, healthy work-life balance, etc. are other examples of how a company develops socially.
• Governance Companies that are highly transparent and ethical with regard to its financial disclosures are generally rated well in the governance aspect of the ESG criteria.

Following the GAAP standards, regular audits, adoption of regulatory reforms are some other signs of a company that is compliant with the regulatory benchmarks.

While ESG rating is not as popular in India compared to several other countries, it sure is gathering a lot of attention from regulatory bodies and investors. In fact, a lot of investors might not know that there is a particular thematic Nifty index that tracks these ESG companies, known as the Nifty 100 ESG Index.This index is made up of companies from across industrial sectors that score well on the ESG criteria and are not part of any major controversies. Infosys, Reliance, HDFC Bank, Tata Consultancy Services, Axis Bank, L&T, and ICICI Bank are currently some of the major constituents of this index.With the growing environmental awareness, ESG rating is only expected to get more popular among investors.

Now that you have an idea about what ESG compliant companies are, it shouldn’t be difficult for you to understand what are ESG mutual funds.ESG mutual funds invest in shares and bonds of companies that are ESG compliant. In a way, ESG compliance means that the company is environmentally, socially, and governance-wise responsible and has taken adequate measures to future-proof itself. In other words, it suggests that the company has excellent future potential, something that every investor looks for while investing.

ESG funds are pure equity funds. Like every other type of pure equity fund, only investors with a high-risk appetite should consider investing in ESG mutual funds. Also, ESG compliance lays a major emphasis on the future of a company. This also means that investors with a long-term investment goal should prefer such funds.But even if you’re a risk-averse investor looking to add some diversification to your portfolio, you can consider investing in ESG mutual funds.

According to Morningstar, $2.96 trillion has already been invested in funds that focus on ESG worldwide. While ESG rating is still nascent in India, the growing awareness is expected to make it a vital component based on which investors will assess companies in the future.By investing in an ESG mutual fund, investors can take advantage of this global trend that is yet to achieve widespread popularity in India. But do consult an investment advisor to know more about what ESG mutual funds are and whether they suit your investment objective.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.