- Date : 20/04/2022
- Read: 3 mins
With ESG funds, you can invest in companies that follow ethical and sustainable practices and display good corporate governance.
Social and ecological responsibility are not just buzzwords anymore but rather the need of the hour. People are becoming conscious of their choices and the impact their decisions make. This, in turn, is pushing businesses to change the way they conduct themselves, giving rise to a new theme for investing that is focused around the environment, social responsibility, and corporate governance - or ESG in short.
What are ESG funds?
ESG funds exclusively invest in companies that follow ethical and sustainable practices, show good corporate governance, and undertake conservation and social initiatives that positively impact the community. This fund does not invest in (say) companies that cause heavy pollution or have exploitative labour practices.
The actions of the businesses are measured on a parameter called ESG score, which ranges from 0 to 100. A higher score is indicative of suitable action around environmental, social, and governance factors. A low ESG score may reflect a business’ indifference towards the impact it has on various stakeholders and also makes it less adaptive to changing social and environmental needs. Such companies may also lose customer patronage or incur penalties for non-compliance with regulatory protocols.
Since ESG investing has started picking up traction, businesses are making a conscious effort to make ESG disclosures for investors to make an informed choice. The National Stock Exchange (NSE) has also launched NSE Prime as a benchmark, which allows businesses to voluntarily accept standards for corporate governance that are higher than that required by regulation.
Why should you invest in ESG equity funds?
Despite the scoring system, there is a lack of standardisation around data collection, information audit, and measurement standards. We are still some years away from better reporting and transparency. Until then, it can be difficult for retail investors to acquire quality information on stock selection.
However, investing through dedicated ESG funds in India allows you to invest in sustainably credible businesses. The dedicated fund management team of an ESG fund will not only sift through the information available in the public domain but also personally speak with businesses to verify data and understand their future sustainability plans.
Best ESG funds India
Other ESG mutual funds
Invesco India ESG Fund
- HSBC Global Equity Climate Change fund of fund
Do bear in mind that different funds have different approaches to investment. Some ESG funds are managed passively. A significant allocation of their portfolio mimics Sensex heavyweights from the IT and banking sector. If you are already invested in these sectors, it would be prudent to check the fund’s portfolio allocation and take a call on whether your personal portfolio needs additional exposure to these stocks.
Some ESG funds also have an allocation towards global stocks via funds-of-funds. Each fund has its own preferences to invest across market cap and sectors. So be sure to check if the portfolio risk is aligned with your investment objectives.