ESG Funds

#GS3 #Economy #Environment

 

Although big in global investments, ESG funds — that imbibe environment, social responsibility and corporate governance in their investing process — are witnessing growing interest in the Indian mutual fund industry too.

 

What is ESG?

  • ESG investing is used synonymously with sustainable investing or socially responsible investing. It looks at three core areas: environment, social responsibility and corporate governance.
  • So, while picking up a stock for investment, the ESG fund first shortlists companies that score high on these three parameters and then look into the fundamentals and financial factors in its investment decision-making process.
  • So, the schemes will focus on companies that adopt environment-friendly practices, follow ethical business practices and are employee-friendly among others.

 

Why is there so much focus on ESG now?

  • Fund houses say that modern investors are re-evaluating traditional investment approaches and when they invest, they look at the impact it is having on the planet as a whole. 
  • This paradigm change is forcing corporations, investment companies and asset managers to realise that investors are no longer only worried about returns. 
  • As a result, asset managers have swiftly started incorporating ESG factors into the investment practices.

 

How big is ESG?

  • There are over 3,300 ESG funds globally and the number has tripled over the last decade. The value of global assets applying ESG for investment decisions today stands at $40.5 trillion.
  • In India, as of now there are three schemes — SBI Magnum Equity ESG (Rs 2,772 crore), Axis ESG (Rs 1,755 crore) and Quantum India ESG Equity (Rs 18 cr) — following the ESG investment strategy in India. While ICICI Prudential’s scheme launched its NFO recently, Kotak Mahindra AMC is expected to launch its NFO soon and more are expected to follow.

 

Significance 

  • As ESG funds gain momentum in India, fund managers say companies will be forced to follow better governance, ethical practices, environment friendly and social responsibility.
  • Globally there has been a big shift on this front as many of the pension funds, sovereign wealth funds etc don’t invest in companies that are seen a polluting, don’t follow social responsibility or tobacco companies and so experts feel this will force companies to do business more responsibly.
  • Industry insiders say while tobacco and coal sector companies, those that generate hazardous waste from their chemical plant and do not manage them properly as well as sectors that use lot of water and do not follow best practices on reuse of water along with companies that discharge untreated waste in soil, water or air will find it tough to get funds parked in them.
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