The Buyt Desk
ESG funds are based on a specific theme of sustainability. The term ESG was first coined in 2005 in a landmark study entitled “Who Cares Wins.” ESG is an abbreviation for Environment, Social and Governance. The foundation of ESG investment rests on the way companies operate rather than the profits of the companies. ESG schemes seek out shares of companies that adhere to the principles of environmental, social and corporate governance. There are currently 11 ESG funds in India, out of which 8 funds have been launched in the second half of 2020 and 2021. Experts feel that the companies whose management adopts these principles have the potential to increase earnings in future.
How are ESG funds emerging?
The Morningstar India’s Research tells us that by 30th June 2021 the retail assets in Indian sustainable funds were INR 119.7 billion, which was a 27% increase compared with 31 December 2020. and a 184% increase compared with 30 th June 2020. Currently there are eight actively managed environmental, social, and governance funds, one passive ESG exchange-traded fund/fund of fund, and two global sustainable feeder funds. Active funds account for 93.5% of the overall sustainable fund assets under management.
The 3 Criteria of ESG Funds look at certain aspects-
Environment – How well the company is managing its waste, pollution and effluents. What role is the company playing in the conservation of natural resources and are they capable of managing their carbon footprints?
Social- Labour law, transparency in business relationships and how well do they manage the health and safety of their employees.
Governance- How transparent are they in conducting business, maintaining accounts and the manner in which board members are appointed.
What to keep in mind before investing in ESG Fund?
Since ESG funds are a newly emerging theme an investor can’t find a track record of past returns. These funds currently include only large-cap companies. Therefore, their allocation should not be more than 5-10% in the portfolio right now. The investment tenure in ESG Fund should be five years.
Pros of ESG Funds –
• Helps the investors to invest in companies with good practices in place
• You invest in companies that promise a secured future
Cons of ESG funds
• Greenwashing- You could get trapped in a company that may make a tall claim to look like an ESG compliant company
• Not suitable for investors with a low-risk appetite or low time-horizon
