ESG Funds Becoming Popular in India
The ESG funds are increasingly becoming popular in the mutual fund industry in India. Recently, ICICI Prudential Mutual Fund has come out with its ESG fund. The first ESG mutual fund was launched by the State Bank of India — SBI Magnum Equity ESG Fund.
ESG FUND:
ESG is a combination of three words i.e. environment, social and governance.
1. It is a kind of mutual fund.
2. The investment is used synonymously with sustainable investing or socially responsible investing.
3. Typically, a mutual fund looks for a good stock of a company that has potential earnings, management quality, cash flows, the business it operates in, competition, etc.
4. However, while selecting a stock for investment, the ESG fund shortlist companies that score high on environment, social responsibility and corporate governance, and then looks into financial factors.
5. Therefore, the key difference between the ESG funds and other funds is ‘conscience’ i.e. the ESG fund focuses on companies with environment friendly practices, ethical business practices and an employee-friendly record.
6. The fund is regulated by Securities and Exchange Board of India (SEBI).
Reason for Popularity:
1. Modern investors are re-evaluating traditional approaches, and look at the impact their investment has on the planet. Thus, investors have started incorporating ESG factors into
investment practices.
2. The United Nations Principles for Responsible Investment (UN-PRI) (an international organization) works to promote the incorporation of environmental, social, and corporate governance factors into investment decision making.
Impact:
1. As ESG funds gain momentum in India, companies will be forced to follow better governance, ethical practices, environment-friendly measures and social responsibility.
2. Companies that do not follow sustainable business models will find it tough to raise both equity and debt.
3. The global tobacco industry profit per year comes to USD 35 billion, however, it causes nearly 6 million annual deaths and investors are growing sensitive to such realities.
ESG funds are not individual stocks. They are a collection of multiple stocks grouped together. Buying a fund rather than an individual stock can decrease risk since a fund holds shares of many companies rather than just one. If one company represented within your fund goes out of business, the fund should weather it better than if you owned stock in a single company that went under.