Parking your money in ESG Funds is a trend catching up fast in a world where sustainability is becoming a key virtue. Good ESG practices translate into a better performance for the business in the long term, making it an attractive choice for investors.
The changing focus towards climate change and sustainability is going to alter our investment decisions too. The uncertainty brought by the pandemic and our vulnerability to forces that are beyond human control have accelerated the inclusion of Environment, Social and Governance (ESG) into mainstream operations of companies and also investor mindsets.
No wonder then that ESG Funds are fast becoming a core element of financial portfolios where investors are putting their money into companies that demonstrate ethical practices across heads of Environment, Social and Governance.
As the name suggests, ESG funds are open ended equity schemes investing in companies that demonstrate sustainable practices across the themes of Environment, Social and Governance.
This essentially includes companies that score high on adopting environmentally-conscious activities that are aimed at preservation and conservation of natural resources. Next, they look at social factors such as the company’s overall approach towards its people and their wellbeing.
They are also measured for good governance which includes business ethics, transparency and adherence to government policies. The companies are also scanned for their financials.
What’s in it for me
Excellent ESG standards are a reflection of a company’s overall quality of management and is therefore considered a time-tested way of wealth creation. ESG is termed as an “essential toolkit" to analyse companies on qualitative aspects which could sometimes get missed out on profit and loss statements.
ESG Funds are aimed at offering investors a healthy mix of equities with the end goal of long term returns while minimizing risks that volatile Capital markets bring with them. While the risk quotient is high, the capital returns over the long term are also promising making such investments a step in the right direction towards wealth creation in the longer term.
These companies have a better reputation and good ESG practices translate into a better performance for the business in the long term. Such businesses will face lower disruption risks to their business models thereby offering a long-term investment opportunity.
The changing paradigm
As Corporate India emerges from the pandemic and companies tread on the path to recovery, stricter regulations and greater adherence seems to be the future. In this changing scenario, the companies that adhere to ESG parameters are on safer ground as they will remain unaffected by the changes in regulations, thereby earning the trust of their customers and stakeholders alike.
This makes them the preferred choice for investors, both domestic and from overseas, who are moving their portfolios towards companies that have sustainability built into their overall structure and policies.
ESG is becoming a necessity in this present-day scenario as there’s country-wide awareness around reduction ofcarbon footprint by 30 per cent by the year 2050, the theme will gather steam and businesses will need to be more responsive with respect to meeting the goals of ESG.
The global picture
There are more than 3,300 ESG Funds working globally today and this figure has become three times over the past decade. The overall value of assets applying principles of ESG to their investment decisions stands at an estimated $40.5 trillion.
As governments across the world channelize funds into health and environment related products, there is an increasing interest in sustainable investing. In India too, a shift is being witnessed towards equity investments based on ESG practices.
India’s first ESG Fund was launched in 2018 and since then, several others have entered the field. According to data compiled by the Association of Mutual Funds in India (AMFI) and Bloomberg, this category now makes up for about 0.6 per cent of total equity Assets Under Management (AUM).
The ESG trend is still catching up in emerging markets owing to different investor dynamics and also because data about companies on these heads is not so easily available in the public domain. But in markets like the US, ESG Funds account for about 1.4 per cent of AUMs according to Bloomberg.
The Axis ESG Equity Fund from the house of Axis Mutual Fund is a diversified equity fund that invests in companies across market capitalization, with a special emphasis on ESG. The aim is to offer investors with a heady mix of equities that offer long term gains and at the same time minimize the risk attached to volatility of Capital markets.