Climate change is a reality. Luckily, there are fabulous opportunities in the stock markets that boost companies over their environmental, social, and governance initiatives. ESG funds are a promising investment avenue all around the world and are becoming popular in India as well. We discuss the ESG fund and its details in this analysis. Let’s begin!
What are ESG Funds?
ESG stands for environmental, social, and governance. Any organization that is performing well today and hoping to maintain this, will have to be ESG compliant in the future. Furthermore, ESG funds allocation comprises shares and bonds of specific companies. Environmental, social and governance parameters are the basis of evaluating the companies.
ESG funds pick only those companies which strictly follow the 3 benchmarks.
E in ESG
E in ESG stands for Environment. Moreover, the melting of glaciers, rise in average temperature globally has shown the drawbacks of global warming.
Reducing forest cover, pollution in rivers, and increasing pollutant level in the air underline this crisis of mankind.
However, we can get it right. We still have time to switch to renewable energy, increase the green cover, better waste management, and pollution treatment, which can subsequently protect our environment.
S in ESG
S in ESG stands for Social. For running their business, corporates thus get their raw material and manpower from the area in which they operate.
While engaging with these resources, it is fair to expect the companies to handle resources in a fair, optimal, and socially responsible manner.
Furthermore, the Companies Act, 2013 mandates spending 2% of net profits towards social responsibility clauses.
G in ESG
G in ESG stands for Governance. Corporate governance is all about the integrity and honesty of the management.
This aspect also has the potential to adversely impact investors’ wealth creation prospects in the long run.
SEBI regulations regarding this are in place for listed companies.
How ESG funds work?
ESG integration is a combination of ESG evaluation with traditional stock analysis techniques. Strictly rated on the ESG parameters. Furthermore, these parameters reflect an organization's culture, risks, management practices, etc. Also, those investors who are looking for environmentally sustainable companies to invest in should go for this.
ESG compliance of organization is based on meeting the criteria of environmental, social, and governance. Moreover, ESG funds meticulously verify those companies which meet the ESG standards. As everyone would be well aware that India is a signatory to the Paris climate deal and is increasingly becoming environmentally conscious.
The companies which will adhere to the regulator's policies vis a vis environmental standards will be less likely to face compliance problems in the future. Their chances of shutting down will also reduce, making them a stable option for investors. Aside from these, companies need to adopt environmentally friendly practices. This will help in their sustenance as well as protect their surrounding environment.
Subsequently, socially developed organizations will treat their employees better. A good example of this would be organizations providing occupational safety to employees, training them regardless of their gender, etc. Taking up CSR initiatives is also a good step. Above all, these companies are compliant with all financial disclosures and are not at risk of closing down.
Thus, investors can confidently invest in such companies.
ESG in the Global Markets
ESG investments consequently form a considerable portion of the global assets under management. One-third of the USD 22.3 trillion AUM comprises socially responsible companies.
Some of the recently launched funds include blue bonds(investing in oceanic protection), green bonds(investing in energy-efficient projects), ESG based ETF to thus name a few. There are more than 3300 ESG funds globally and this figure has subsequently tripled over the decade.
ESG in the Indian Markets
The demand and subsequent growth of ESG in Asia, specifically in India, has been phenomenal. In India, it is 32%. People are becoming more inclined towards sustainability. There have been instances in the past where regulators have penalized non-compliant companies.
Many such companies have thus had to shut down. Thus, more and more companies are becoming aware of complying with ESG standards. Currently, the following ESG funds in India can be considered worth investing,
1. SBI Magnum Equity ESG Fund
2. Aditya Birla Sun Life ESG Fund
3. Axis ESG Fund
4. ICICI Prudential ESG Fund
5. Kotak ESG Opportunities Fund
Benefits of ESG investing
1. Competitive Returns: Companies investing in ESG initiatives have reaped great returns. According to a 2015 report by Oxford University and Arabesque Partners, it is in the best interest of managers and businesses to implement sustainability considerations into their decision-making process. This has augured well for their investors also.
Moreover, enterprises like Coca-Cola have implemented ESG compliance by steps like reducing 20% water intensity in their production process and generated great returns.
2. Diversification: Investors can sort out companies that thus score strongly on ESG norms and do away with stocks that are performing badly. This will subsequently create better diversification.
3. Contributes to Nature: Investing in ESG funds boosts the climate-conscious activities of all organizations, as it acts as an incentive to adopt environment-friendly and better social practices.
It generates healthy competition in companies to score better so as to rank high in the ESG list. This leads to environmentally sustainable practices.
Conclusion
ESG is the shorthand for Environmental, Social, and Governance. ESG funds thus invest in companies that score very high on these parameters, especially on the Nifty 100 ESG index. Companies which are ESG compliant will be stable in the future, in light of the impending climate disasters that might occur.
Subsequently, such companies will also be in line with the regulator's policies regarding ESG compliance and would not shut down. This will make it easier for investors to place their bets and enjoy rich dividends. ESG funds are getting increasingly popular in India and promoting better practices in organizations. Happy investing.
