Environmental challenges are affecting countries and communities the world over. This is changing how people view their contribution towards improving the world People are expecting companies to be a lot more responsible towards the environment, the society & ethically cautions in into their day-to-day affairs. This change of attitude has also led to new category of investors who are actively seeking to invest into companies which at the forefront of ESG commitment.
Now, let’s dig deeper to learn about ESG funds and why you should invest in them.
What are ESG Funds?
ESG is the short form for Environmental, Social, and Governance. ESG funds invest in company stocks that follow:
● Environment-friendly practices
● Maintain high standards in social responsibility
● Promote corporate responsibility
In essence, ESG mutual funds invest in companies that score high on the ESG parameters. Different research organizations assign ESG scores to various ESG funds based on a fund’s risk management capabilities across E (Environment), S(society) and G (Governance) parameters.
Which Companies do ESG Funds Invest In?
Only those company stocks are considered for ESG investment if they take care of the three ESG factors:
● Environmental: The corporation must follow practices to:
a. Reduce greenhouse gas emissions
b. Create sustainable goods
c. Use natural resources efficiently and promote sustainable development
d. Handle recycling in an environment-friendly way, and many more
● Social: The corporation must be a socially responsible organisation. It must follow practices that promote a business' social elements, such as:
a. Undertake measures to protect workers from any occupational hazard.
b. CSR (corporate social responsibility) initiatives
c. Undertake measures to treat workers of all genders fairly
d. Promote a good work-life balance and many other social factors
● Governance: The company must take care of corporate governance factors such as:
a. Acceptable executive remuneration in case there is a diverse board of directors
b. Responsiveness of the board of directors to shareholders and more
Note: The above list of parameters is indicative and not exhaustive
Top 3 Things To Consider Before Investing In ESG Mutual Funds
1. Fundamental Benefit
The prime advantage of investing in ESG funds is to help support responsible corporate behaviour without incurring high fees or sacrificing performance. You can bring a beneficial influence by focusing on:
● Sustainable development
● Women's empowerment and many other CSR/environmental factors
2. Lack of Diversification
In addition, your investment portfolio gets narrowed as these funds may avoid investing in businesses dealing with cigarettes, alcohol, ammunition, armaments, and many more. That's why investing in ESG funds can lack adequate diversification across sectors and industries. Keep this in mind before investing.
3. Valuable Investment Tool and Not for Philanthropy Only
Many believe that ESG investing is only philanthropic in nature. In reality, ESG funds focus on both sustainable investments and better returns.
Investing in ESG funds can have a promising future. It can help you reap the long-term benefit and possibly high returns, you may start investing in ESG funds.
The information herein is meant only for general reading purposes, and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.