ESG funds stands for Environmental,Social,and Governance funds. It is a framework that helps stakeholders or investors to understand how an organization works in a sustainable manner. For any successful growth of an organization it’s important to manage risks and opportunities around sustainability issues.
Through this blog let’s understand what are esg funds? What is the importance of these funds, their functions and many more! So let’s start with esg funds meaning first. Also we are going to have a deep overview of esg funds in india.
What is ESG?
To understand about esg funds let’s first know about the term Environmental, Social and Governance (ESG). It is a term used to represent an organization’s corporate financial interests that focus mainly on sustainable and ethical impacts. Environmental, social, and governance (ESG) criteria are used as a guideline. ESG is used for both corporate management and investing (an investment strategy known as ESG investing).
3 COMPONENTS OF ESG
3 key components of ESG funds are – Environmental, Social and (corporate) Governance aspects. Since ESG factors are often interrelated, there may be scenarios where identifying and classifying an ESG activity as only an Environmental, social or governance practice might not be feasible. There are no set examples of ESG issues and the list continues since new emerging issues arise constantly. Let’s explore the ESG fund criterion! Connect with our ESG Consultants for expert consultancy on ESG related services.
1. Environment:
This component essentially targets conservation and preservation of the natural world and its scarce resources. This criterion vitalises whether a company adopts a low carbon footprint and follows ecofriendly methods in its functioning. This advocates wise and efficient use of resources. Some factors include- Air and Water pollution Biodiversity Loss Deforestation Waste management Carbon footprint, global warming Climate Change impact Water Scarcity Natural resource conservation.
2. Social:
This aspect focuses on broad features of social aspects, majorly pivoting around consideration of people and relationships. At the core of any business organization are its people. Socially developed organizations respect and hub human fostering and growth of its employees and community. This criterion looks at a company’s business relationships with its customers, community and business partners. It even observes how a business organization upholds social good in the wider world, which is not limited to mere scope of business activities.
Other factors include-
- Customer Satisfaction Gender equality and Diversity Human rights
- Employee engagement and satisfaction
- Labour laws
- Community relations
- Data protection and privacy Engaging in volunteering work to improve the socio-economic conditions
3. Governance:
This criterion elucidates standards for running a company, it considers how the board and management drive positive changes. This also features the transparency and ethical well-being of the company and holds the highest standards of governance consistently. It also takes into account the executive management’s behavior to cater to the needs of various stakeholders- employees, shareholders and customers. This is the base, the foundation through which a company is gauged. Apart from this, other factors include-
- Composition of the Board of Directors
- Audit committee structure Lobbying
- Whistle-blowing schemes
- Bribery and corruption
- Political associations and contribution
- Executive compensation
- Engaging in illegal and unfair practices
What are ESG funds?
Environmental, Social and Governance funds known as esg funds. It’s an important evaluating factor for socially responsible and aware investors. It is a very broad term used to describe any investment. In simple words, they are investments for which the fund managers used environmental, social, and governance (esg funds) criteria. Which further informs its composition and asset allocation strategy for any organization.
From the above context you all have got a brief idea about esg funds. Now let’s go through some important functions of the same!
ESG funds are bonds and equity portfolios that prioritize ESG factors in the investment methodologies. They pick on the securities that come with high sustainability scores while excluding those with rampant ESG issues, such as poor records on pollution and labor relations. Let’s have an overview on functions of esg funds:-
- They are investment options that consider environmental, social, and governance issues of companies they invest in.
- They aim to generate positive social and environmental impact along with financial returns.
- They can help investors align their values with their portfolios and support causes they care about.
What are non-ESG funds?
Any other form of investment that does not rely on environmental, social, and governance principles may be considered as non ESG funds.The ESG based funds carry a higher expense ratio (0.51%) than the non-ESG funds (0.38%), and this affects the tracking error in the same direction (0.68% for ESG funds and 0.59% for the non-ESG funds).
Does ESG outperform non ESG? A study from The Journal of Finance found that out of a pool of 20,000 mutual funds with $8 trillion in assets, those rated highly for ESG factors did not outperform those rated poorly. There are many possible reasons for this.
Types of ESG funds –
Most common types of ESG funds are as follows:-
1)ESG mutual funds,
2) ESG exchange traded funds(ESG ETFs), and
3) ESG index funds.
- ESG mutual funds –
These are professionally managed funds that contain stocks and bonds with predetermined ESG criteria. The investors get the benefits of diversification, liquidity, and professional management.Mutual funds are Required by law to disclose their performance and associated fund activities publicly.
- ESG ETFs –
ESG exchange traded funds are similar to mutual funds in the sense that they contain a variety of ESG centric stocks,bonds, and other financial instruments. ETFs are traded freely on stock exchanges.
- ESG index funds –
It is the type of ESG mutual fund. While ESG mutual funds are actively managed by a portfolio manager, an ESG index fund passively tracks the ESG centric companies that trade on an index.
ESG Funds Performance in India
- SCOPE IN INDIA
Now you should know about the growth of esg funds in india. As well as let’s analyze the performance of existing funds in the category. Since the introduction of Nifty 100 ESG Index in 2011, it has outperformed its parent index with a return of 10.6% as compared to 9.1% of the traditional Nifty 100 Index. This proves a steady growing interest in ESG investing by Indian investors.
The demand and growth for these funds vanguard in India is experiencing an upward curve and with pandemic hit it all went uphill. The covid crisis turned out to be an inflection point in the minds of Indian investors and the flow of money has remarkably risen into ESG funds says Kaustubh Belapurkar, Director of Fund Research at Morningstar India. Earlier Indian investors did not have many ESG funds options but after October 2020, more than half a dozen asset management companies have introduced ESG-centric fund plans.
Major funds include Axis ESG Equity Fund, Quantum India ESG Equity, SBI Magnum Equity Fund (oldest ESG fund in India). Apart from these, ICICI Prudential AMC, Kotak and Aditya Birla have also introduced such funds. Currently, India has two major ESG indices, S&P BSE 100 ESG Index and Nifty 100 ESG Index. As per Morningstar, in the quarter ended December 2020 Indian Markets were flooded with a net inflow of ₹3,749 crores into ESG based funds and in March 2021 it saw a net inflow of ₹ 678 crores. Since inflow of capital into these funds in India is experiencing a boom! It is very likely that other companies will follow through and exhibit better Environmental, Social and Governance practices. Thus we can see that how organizations are adopting esg funds in india.
It is claimed that companies complying with the ESG mandates are likely to deliver a sustainable performance over the long term and hence, investors looking for attractive opportunities And long term investments . Following its global peers, India also has joined the bandwagon of ESG investing in the fields of mutual funds.
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These funds are increasingly becoming popular in the mutual fund industry in India. Recently, ICICI Prudential Mutual Fund has come out with its ESG fund. One of the interesting facts is that the first ESG mutual fund was launched by the State Bank of India – SBI Magnum Equity ESG Fund. The esg fund in india is regulated by the Securities and Exchange Board of India (SEBI).
Let’s know about the role of SEBI in ESG funds. Capital markets regulator Sebi has proposed allowing mutual funds to introduce five new categories under ESG (environmental, social and governance) scheme. The five new categories should be exclusions, integration, best-in-class and positive screening, impact investing and sustainable objectives.
- Are ESG funds a good Investment ?
We can say yes. In India the success of them can be explained largely due to more investors getting socially aware and conscious regarding the ESG factors. Moreover, factors such as statutory conditions have played a vital role to impel companies to be more ESG biddable.
Apart from this, numerous foreign institutional and independent investors are extensively investing in ESG compliant companies and sustainable business models. These lucrative offers have attracted many firms to follow regulations and prospects of Foreign Direct Investment (FDI) have made ESG investing even stronger in India.
As I said earlier covid pandemic was an inflection for investors which helps to prove these funds a good investment.
The rising concern for environment friendly methods and Covid pandemic have proved to be the main cause for this boost of ESG funds in India.
- FUTURE OF ESG INVESTING IN INDIA
The way ESG has performed in India can be nominated as fabulous but if we look at ESG in other corridors of the world, we can say that we still have a long way to go, but nonetheless India is moving ahead in this avenue. ESG compliant companies in India will also observe a significant rise in market share due to adding interest by consumers and non-compliant competitors floundering to meet the norms and pass the bar. Following standards and rules will enhance the company’s reputation and credibility by several folds and will also attract investors due to a sustainable future.
- ESG FUNDS COMPANIES IN INDIA
Currently India has 10 ESG centric funds and each fund has different attributes. Some funds have an allowance for global stocks, some funds have their own market capital and have different sector preferences and some are passive funds.
The esg funds companies in India are –
- SBI Magnum Equity ESG Fund
- Axis ESG Equity Fund
- Quantum India ESG Equity Fund
- Aditya Birla Sun Life ESG Fund
- ICICI Prudential ESG Fund
- Invesco India ESG Equity Fund
- Kotak ESG Opportunities Fund
- Mirae Asset ESG Sectors Leaders Fund
- Quant ESG Equity Fund
- HSBC Global Equity Climate Change Fund.
Factors Behind ESG Growth
- Greater policy focus on aspects such as cleanliness, skill development, expanded healthcare coverage, and education indicates potential public investment in these social development and environmentally sensitive sectors of the economy.
- There is increasing awareness and understanding among younger investors about the impact of business on social development and environment.
- 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.
- 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.
ESG SCORE
So now let’s look at one important term ESG score is? An ESG score is an objective measurement or evaluation of a given company, fund, or security’s performance with respect to Environmental, Social, and Governance (ESG) issues. SG scoring systems tend to be either industry-specific or industry-agnostic. Industry-specific scoring systems assess issues that have been deemed material to the industry at large. Industry-agnostic ESG scores tend to incorporate widely accepted factors that are meaningful across industries – issues like climate change, diversity, equity and inclusion (DEI), and human rights.
ESG rating platforms determine a weighting for each measurement criterion; then, they assess an organization’s performance against each criterion. An organization’s final ESG score is typically a sum-product of the criteria ratings and the (proprietary) criteria weightings.
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Benefits of Esg Funds
The benefits which we and environment get from investing ESG funds are as follows:
- They can help diversify your portfolio and protect against potential risks. Additionally, they also tend to outperform their traditional counterparts over the long term.
- ESG-focused companies have sustainability strategies and tend to have better operational efficiency, cost savings, lower employee turnover, innovation, retained talent, reduced compliance costs, and risk management — all of which may help to increase shareholder value.
- ESG investing is having potential to to help the environment and help solve climate change
- Investing in ESG-focused companies goes beyond financial returns, and places high priority on social benefits, such as protecting employee welfare and fostering relationships between businesses, shareholders, and communities.
Concerns with ESG funds
Alongside the greater attention on issues such as climate risk, emissions, supply chains, labor rights, anti-corruption, etc., certain concerns have been flagged as well.
- Greenwashing is one of the top concerns among global institutional investors.Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.
- Investment experts have also pointed to the tendency of fund managers to overweight certain stocks and companies in a situation where most large investment-friendly companies have fallen short of the qualitative and quantitative parameters used for ESG investing.
FAQs
Ques 1) What are the 3 pillars of ESG?
Answer- There are three pillars of corporate sustainability: the environmental, the socially responsible, and the economic.
Ques 2) What are non esg funds?
Answer- Any form of investment that does not rely on environmental,social and governance principles considered as non ESG funds.
Ques 3) What is the downfall to esg investing?
Answer- The case against ESG investing.Surprisingly, the research showed that the companies in the ESG portfolios had worse compliance records when it came to labor and environmental issues. They also found that even after companies were added to an ESG portfolio, they did not improve their labor or environmental records.
Ques 4) Are esg funds good?
Answer- Yes! ESG stocks generate comparable or superior financial results compared to non ESG focused peers. So we can say it’s growing and to invest in the same.
Ques 5) What is the return from esg fund?
Answer- Here are some benefits or return of esg funds-
- healthier and more sustainable world,
- higher returns, lower risk.
- chances of more stable and higher returns due to better practices.
- push companies to be answerable for any activity which has negative impact on society and environment
- companies which integrate and develop strong ESG practice will reduce occurrence of severe events
- better brand image,
- better management of customer & employee relationship and operational process
- lead to increased productivity and competitive advantage
Ques 6) Which ESG fund is the best?
Answer- The largest individual ESG fund is Parnassus Core Equity Fund, which has $22.9 billion in assets.
Ques 7) Do ESG funds underperform?
Answer- On a one-year basis, 63% of global ESG products underperformed. This reflects the overall underperformance of growth products, as 73% of these investments underperformed the index.
Ques 8) Which is the largest ESG fund in india?
Answer- Axis ESG Equity Fund,Kotak ESG Opportunities Fund, Aditya Birla Sun Life ESG Fund, Quantum India ESG Equity Fund these are some largest ESG funds in INDIA.
Ques 9) Who regulates esg funds in india?
Answer- Securities and Exchange Board of India-SEBI regulates ESG funds in INDIA.
Ques 10) Are ESG funds less risky?
Answer- Research conducted using Morningstar data shows that these funds carry more small-cap risk, interest-rate and inflation risk.
Ques 11) Which funds are most risky?
Answer- Mid & small cap funds invest in mid & small (or startup) companies, respectively. Since these funds consist of stocks of emerging companies, they are very risky in nature.
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