What are ESG mutual funds and should you invest in them? It's more than helping save the planet

Investing is primarily driven by the desire to earn profits. Some investors, meanwhile, choose investments for reasons different from profitability. They consider the company's environmental stance, its social impact and governance values that it stands by.

Collectively, these characteristics are known as ESG (Environmental, Social and Governance) and funds that invest in these companies are known as ESG funds.

What are ESG funds?

ESG funds refer to mutual funds which invest in companies based on their environmental, social, and governance (ESG) criteria.

What are the three vital elements of ESG?

Environmental: It includes the company's impact on the environment and its commitment towards sustainability. If the company's strategic decisions are influenced by its commitment to the environment, then its score on that aspect would be high.

Social: This includes how the company treats members of society, especially its employees, customers, clients, and the community in which it operates.

Governance: This reflects the state of leadership and internal controls. This includes shareholder rights, overall diversity and compensation paid to executives.

Which are the popular ESG funds in India?

Some of the popular ESG mutual funds launched by major AMCs in India include:

>> Aditya Birla Sun Life ESG Integration Strategy Fund

>> Invesco India ESG Integration Strategy Fund

>> Kotak ESG Exclusionary Strategy Fund

>> Quantum ESG Best In Class Strategy Fund

>> Mirae Asset Nifty 100 ESG Sector Leaders Fund of Fund

>> ICICI Prudential ESG exclusionary Strategy Fund

What are the major reasons to invest in ESG funds?

Some of the key reasons that prompt people to invest in ESG funds are as follows:

A. Aligns with their personal values: Most investors choose to invest in ESG funds because they align with their personal values.

B. Avoiding risk: ESG funds generally have a lower risk of reputational damage or regulatory crackdown. They are low-risk investments by that standard.

C. Growth potential: Since they are high on governance, they are believed to have a high growth potential. Therefore, some investors choose these companies for their high growth potential.

D. Long-term resilience: ESG companies are generally more resilient and considered more adaptable to future uncertainties, which may arise on account of technology, demands of stakeholders, innovation or staff retention.

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