Indian government’s policy framework is changing to promote environmental friendliness and social responsibility. Due to the policy parameters change in India, NSE (National Stock Exchange) introduced NSE Prime in late 2021. It was introduced to nudge corporates to voluntarily raise corporate governance practice levels. It is believed that companies with the NSE Prime benchmark would lead to:
● Better decision making
● Protection of shareholder interest
NSE Prime companies are expected to send a message to the investors that these companies practice corporate governance standards and set a higher standard of accountability for themselves.
More investors have started investing in Environmental, Social and Governance (ESG) funds thanks to this positive initiative
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
● Environment-friendly practices
● Promote corporate responsibility
In essence,
ESG mutual funds invest in companies that score high on the ESGs based on ESG scores. Different research organizations (including Morningstar, MSCI, and others) allot ESG scores to various ESG funds based on a fund’s risk management capabilities. As an investor, you can check the ESG score or scale to decide which ESG fund list you want to invest in.
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 goods that are sustainable
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 organization. It must follow practices that promote a business' social elements, such as:
a. Undertake measures to protect workers from any occupational hazard.
b. CSR 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
Should you Invest in ESG Funds?
1. Fundamental Benefit
The prime advantage for you to invest in ESG funds is to participate in corporate affairs and bring a beneficial influence by focusing on:
● Community
● Sustainable development
● Women's empowerment and many other CSR/environmental factors
2. Lack of Diversification
ESG funds mainly invest in large-cap stocks. This is because companies with high market capitalization usually follow CSR and environmental initiatives. When you invest in ESG mutual funds, you may miss the benefits of investing in small and medium-cap companies. In addition, your investment portfolio may get narrowed down to investing in companies practicing ESG methodology only. ESG funds may avoid investing in businesses dealing with cigarettes, alcohol, ammunition, armaments, and many more. That's why investing in ESG funds could 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 possibly inflation-beating returns by investing in companies with better market capitalization. Therefore, you can include ESG mutual funds in your investment portfolio to get decent returns.
Conclusion
In conclusion, by focusing on emerging sectors such as solar energy, recycled products manufacturing, hydro energy, and others, investors align their portfolios with sustainable and socially responsible practices. This not only contributes to positive environmental and social impacts but also may positions them to capitalize on the growth of these resilient sectors in the years to come.
Sector disclaimer: Sector(s) / Stock(s) / Issuer(s) mentioned above are for the purpose of disclosure of the portfolio of the Scheme(s) and should not be construed as recommendation.
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.
