Try imagining this: You are investing your hard-earned money and positively impacting the world together. Sounds too dreamy. Well, it is possible now with ESG funds! This revolution has begun and is happening now as we speak! Who wouldn’t want to earn money while also positively impacting society?
ESG stands for Environmental, Social, and Governance. These funds go beyond traditional investment methods and invest in companies prioritising sustainable development and social responsibility! But let’s address the question of the hour—are ESG funds really profitable for you as an investor, or are they just a fancy new investment scheme that looks good on the outside but gives no returns?
This blog will tell you everything you need to know about ESG mutual funds and guide you through this unique concept of investing and positively impacting society! We will break down difficult-to-understand terms and financial slang into more straightforward and easy-to-understand words! Explore the definitions, benefits, and drawbacks, and help you decide whether you should invest in ESG funds or not!
WHAT ARE ESG FUNDS: BASIC DEFINITION!
ESG stands for Environment, Social and Governance, has emerged as a recent trend in the Indian investment industry. ESG funds invest in companies that prioritise social responsibility and sustainability.
These funds invest in companies that meet these specific criteria!
- Environment: This covers a company’s impact on the environment, including pollution, waste management, carbon emissions, etc. An E-compliant company will handle the harm it might cause, leading to a greener and pollution-free environment.
- Social: This covers employee welfare and societal welfare. An S-compliant company will care for its employees, ensure their welfare, regularly contribute to society, and prioritise societal welfare.
- Governance: A G-compliant company prioritises regulatory compliance, ethical conduct, and solid internal controls against wrongdoings. The absolute core of this factor is corporate governance.
While ESG funds invest in companies with a proven track record of prioritising these factors and aligning with sustainable practices, please note that most ESG funds in India do not have a long-term track record.
Types of ESG strategies
ESG mutual funds come in various types and forms, each with unique characteristics and features. Here are some of the most common types of ESG funds:
Exclusion: These funds exclude specific sectors, products, or industries that may potentially harm the environment and society, such as tobacco, weapons, or fossil fuels.
Best-in-Class Funds: These funds are funds invested in companies with the best ESG ratings within their respective industries and sectors. These are distinguished companies with high ESG ratings that claim to be socially and environmentally aware of their workings!
Sustainable objectives: These funds invest in companies focused explicitly on sustainability themes such as clean energy, gender diversity, or water conservation.
Impact investing: These funds usually invest in companies focused on creating a positive social impact and seeking higher returns for investors.
Investments pertaining to or supporting transition: The goal of this approach is to place money into businesses and issuers that encourage or assist in just and environmental transformation. An observable and beneficial social and environmental shift should result from the investment.
Integration: When making investment decisions, this technique expressly takes into account traditional financial considerations as well as ESG-related aspects that are relevant to the investment’s risk and return.
What are the Benefits of Investing in ESG Funds?
Investing in ESG funds can offer several advantages to the inventors. Here are some of them:
Positive Impact: Investing in ESG funds can contribute to positive social and environmental change in the economy, as it invests in a company that has achieved good ratings in ESG factors.
Traditional risk minimised: It invests in the companies after considering environmental, social, and governance factors, thereby reducing the exposure to traditional risks.
Long-Term Performance: ESG funds invest in companies with high growth potential and follow ESG parameters. Some studies suggest that companies with strong ESG practices may be more likely to outperform in the long run.
ESG Funds: How and where do they invest?
We now know what ESG is and what an ESG score signifies, but how does it apply to ESG Mutual Funds? How do ESG Mutual Funds in India apply the ESG theme to their portfolios? Let us help you with these answers.
The investment method for ESG mutual funds involves assessing a company’s environmental (E), social (S), and governance (G) standards. These thematic mutual funds make investments in socially conscious businesses. Sustainable growth is the goal of ESG-compliant organisations that are invested in by ESG funds. Businesses have business models that can successfully traverse sustainability regulations and greatly aid investors in long-term wealth generation. 80% of the fund’s investments must be allocated in accordance with SEBI criteria, and the fund may invest across market capitalisations depending on its investment strategy.
Some Risks Associated with Investing in ESG Mutual Funds!
You should consider several factors before you start investing in an ESG mutual fund. These funds can provide some unique and wonderful advantages, but some risks are also associated with them. Before buying an ESG mutual fund, consider the following points to be 100% sure of your investment choice!
- Lack of Diversification: Since ESG mutual funds usually concentrate on a single form of investment, they are not as diverse as other funds. This lack of diversity can increase the volatility of the investment portfolio and your total risk by increasing it.
- Limited Investment Possibilities: When you invest in an ESG mutual fund, you should also realise that very few investment options may be available. This could make it harder for you to choose the ideal investment for your portfolio and result in missed opportunities that you might regret later on!
- Fees: This is very important from the point of view of an investor. You should be aware that the fees of ESG mutual funds are typically higher than other available investment options in the market. The specialised nature of these funds frequently results in higher operational costs. Compare fees thoroughly before investing in ESG mutual funds, and then decide whether the added expense is worth it!
Disadvantages of Investing in ESG Funds:
- The performance of an ESG fund highly depends on the specific companies and industries they invest in primarily.
- When compared to other funds, many ESG funds have extremely high fees, which might eventually lead to lower returns.
- It can be challenging to find truly sustainable investments and invest in them, as most companies might have some level of link to environmental or social issues!
ON A PARTING NOTE…
The world and concept of ESG investing are constantly evolving. As these funds gain relevance and importance, questions about their long-term impact and effectiveness will emerge in the future and continue to plague the mind of an investor. Will ESG funds truly transform or change the investment landscape? Can they actually deliver strong returns while prioritising positive changes in society? The future remains unseen, but one thing is sure! ESG funds offer a unique chance to align your financial goals with a vision for a sustainable and positive future. You have reached the end of this blog, and we hope you are well-informed and familiar with the concept and relevance of ESG funds!
Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read all the scheme-related documents carefully before investing.
