- 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.
- Even on the performance front, fund managers say globally ESG non-compliant companies tend to perform poorly over the long-term due to issues such as
- a higher cost of capital, higher volatility due to controversies, labour strikes, accounting fraud, and other governance irregularities.
How big is ESG?
- Globally, ESG is getting bigger with each passing year.
- 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.
Which sectors or companies will lose out?
- 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.