The Buyt Desk
Investing in ESG funds is a sustainable investment as the investment is made in the companies having a viable and integrated business practice.
What does ESG mean?
ESG stands for Environmental Social Governance. ESG compliant companies are considered to be ethically conscious that along with financial returns, takes care of its effect on the environment and maintains a good standard of corporate governance. Below is what ESG means with respect to the company compliance
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Environmental – As per this factor, the company should take care of the aspects causing damage to the environment. Every activity carried out in the company should consider meticulous use of energy and water, sustainable waste management, diminishing carbon emissions, reducing use of non-biodegradable materials and preserving a greener environment.
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Social – As per this factor, the company should consider the well-being of its employees, stakeholders and the society. Along with business, focus should also be on employee welfare, pay parity, gender equality, support LGBTQ rights and working for social causes.
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Governance – As per this factor, the company should follow corporate governance. Along with business, its emphasis should also be on whistleblower policies, regulatory compliances, transparency, ethical conduct, grievance addressing and policies to handle wrongdoings in the company.
An organization or a company is considered ESG compliant if it follows all the norms of environmental, social and governance aspects.
What are ESG Funds?
At a time where people are becoming more and more concerned about the environment and well being of the planet, ESG fund captures the attention. ESG funds are for people who want to lead a sustainable life and want to invest in companies that are sustainable, ethical and conserve the environment. ESG funds consider non-financial factors of a company to invest in their stocks. The companies that have least or zero impact on the environment, have no social risks, are devoted to corporate social responsibility (CSR) measures and who cause no issues to stakeholder and the society are considered for investment. The company goes through stringent monitoring before ESG tagging. Asset allocation in ESG funds mostly includes shares and bonds of ESG compliant companies.
What is an ESG score?
ESG score is used to determine the level of company’s compliance to ESG standards. ESG scoring is done based on internal reporting or done by a third party. Each of them have their own methodologies to assess and score the company. Some give grading, some give scores and some provide a breakup of E, S, and G scores. Below are two types of scoring bodies
1. Corporate reporting – The companies that abide by ESG initiatives periodically publish their reports containing measurable goals, plus the progress against those goals along with many other details. This reporting follows ESG standards established by the Global Reporting Initiative (GRI) and/or the United Nations Principles for Responsible Investment (PRI).
2. Third-party sources – There are many organizations that analyze and rate the companies. Reports of these third parties can be considered to evaluate. Like to validate sustainability reports of the company, MSCI ESG Ratings or Sustainalytics ESG Ratings can be considered and to validate employee-related reports of the company, Fortune’s Best Companies to Work For, Forbes’ Just 100 and websites such as Glassdoor.com can be considered.
How and where do ESG Funds invest?
ESG Funds invest in companies that have good ESG score, companies from different sectors like technology, financial services, FMCG or Consumer Durables who are environmental, social and governance factors compliant. ESG funds may have its own way to assess the compliance of the ESG organizations apart from ESG score. Based on the fund’s investment plan, it can invest across market capitalizations and even in overseas stocks that comply with the ESG framework. Though ESG investing anchors on finding liable organizations that offer sustainable growth, it also concentrates on building investor’s wealth, both these factors are considered before investing. The companies with higher ESG scores have a lower cost of capital in four years compared to ones with lower scores. This implies more profits and good returns for investors.
What are the taxations on EGS funds?
Investments in ESG funds are taxed as regular equity investments. Long-term capital gains (LTCG) tax at 10% is applicable for investment above 1 lakh which is held for more than a year. Short-term capital gains (STCG) tax at 15% with extra surcharge and cess is applicable for investments held for less than a year.
How are ESG funds faring in the Indian Market?
ESG funds have good growth and demand in India. Indians are more inclined towards sustainability. Regulatory requirements are forcing the companies to be ESG compliant as many organizations are shut down for not abiding by the laws. The interest of foreign investors in sustainable and ESG compliant companies is another factor influencing the companies. Day by day regulators are becoming more stringent and making the company robust to be ESG compliant. The ESG compliant companies have more possibility to acquire significant market share compared to their non-compliant competitors. The company’s credibility and reputation in the market increases several folds on becoming ESG compliant and thus can attract investors.
Should You Invest in ESG Funds?
The ESG concept is new and different for Indians. To understand the risk and volatility of investment, there is not enough data on fund performance. So it becomes difficult to understand if funds fall in your risk profile or not. There is a need for long-term data to evaluate and this will take a few more years. There are very limited ESG compliant companies in India. Also, there are no standard and formal reports and numbers about the company, making it even more difficult to analyze. Three major hurdles to evaluate are there are neither universal ESG standards nor long-term data on the financial performance of ESG companies and companies could stop voluntary ESG issues reporting anytime. It would be better to wait for a few more years before investing.
