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ESG investing, or investing based on environmental, social and governance parameters, is an investment philosophy that has gained popularity across the world in the past few years. Mint decodes what this concept means and how it can be applied in India.

How do we define ESG investing?

ESG investing is synonymous with sustainable investing. It is an umbrella term for investments that seek positive returns by engaging with ethical firms. ESG investors avoid stocks of companies that fail to meet certain environmental, social or corporate governance standards. Examples of such stocks could be heavily polluting chemical companies, or companies which have poor labour standards, or are unfriendly to minority shareholders. ESG investing has gained currency across the world in recent years, with funds following the model surpassing $1 trillion in assets in August 2020.

Have any of the Indian funds adopted ESG?

A number of mutual fund houses have launched ESG funds in India. Axis AMC launched Axis ESG Fund in February 2020 and SBI reclassified its equity fund as an ESG Fund in 2018. Mirae Asset Mutual Fund launched an ESG Exchange Traded Fund (ETF) in October 2020. However, there are no uniform standards for ESG yet and fund houses have adopted their own methods to determine which stocks make the ESG cut. Alternatively, you can construct your own ESG portfolio, but this will require you to devote a significant amount of time and energy towards researching these companies.

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How have the returns of ESG funds been so far?

Theoretically, giving up certain categories of stocks should reduce returns. However, in India, ESG has delivered higher returns over certain time periods by screening out firms with issues. For instance, as of 30 October, the Nifty ESG Index delivered a five-year return of 10.80% CAGR, vis-à-vis 8.99% on Nifty 50, but funds have different methodologies, and so returns may vary.

What should be kept in mind while investing?

First, verify that the fund offered is following ESG principles rather than using it as a marketing ploy, by checking its portfolio thoroughly. Secondly, check the methodology. What may be ESG to the fund house may not be ESG for you. For example, the methodology may not have equality for LGBTQI persons as a criterion in some jurisdictions, but it may be something that you as an investor care about. Fund houses usually make the selection criterion available on their websites.

Are there other ways to invest responsibly?

Yes, apart from funds branded as ESG, there are other ways to ensure that your fund manager is investing ethically. Mutual Funds have to post their participation and voting records in companies on their websites each year as per Sebi rules. You can take some time to study this. The regulator has also come up with a stewardship code that all AMCs have to comply with. Also, pay attention to aspects like fund manager remuneration and how the fund house responds to investor grievances when you look at mutual funds

Neil Borate
Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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