Investing In ESG Mutual Funds Is The Future of Investing

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Electric cars are increasingly seen on Indian roads because many buyers are concerned about the harmful effects of emissions from traditional fuels. Solar panels on apartment and office complexes in cities are a common sight as India moves towards cleaner and greener energy.

Businesses too are looking beyond just the mere legal requirements to reduce emissions, etc., and building sustainable products and sustainable business models. They see the potential upside of being seen positively by customers and also realise that building a sustainable business can generate faster business growth.

Since such companies have a bright future, it’s clear that investors too need to look closely at those companies for growing wealth. These companies are quite literally the future of business, and the future of wealth creation.

ESG investing

This is where ESG investing comes in. Short for environment (protection), social (responsibility), and (corporate) governance, ESG investing is all about investing in the companies that are mindful of protecting the environment when it comes to their factories, packaging and products, are considerate to the society they operate in and meticulously comply with all regulations in these matters. A company’s performance is thus evaluated not just by the profits it earns for shareholders but by the positive impact it leaves on society at large and the environment.

But how do investors distinguish between companies that have truly balanced ESG priorities and business realties? That’s where the expertise of ESG experts in the financial sector is important because they understand ESG as well as business imperatives and can help investors place and grow their wealth in companies that are truly sustainable not just from an ESG perspective but also from a business model perspective.

An ESG fund is a mutual fund whose portfolio is invested in equities and bonds of the companies that are assessed on environmental, social, and governance factors.

Demystifying ESG

Environment: The first part of the assessment involves looking at the environmental impact of a company. Is the company contributing to a clean environment by following green practices? For example, are its factories and its practices and processes environment-friendly?

In the case of an automobile maker, for instance, does it focus on manufacturing vehicles running on electricity or greener fuels, or focus on low fuel consumption to minimise hazardous emissions? Or does the company in question manufacture or use green technology equipment, or house its data centres in green buildings?

Social: The second part is about social impact. Does the company invest in creating a safe, hazard-free environment for its employees? How does a company empower its human capital? Does it have policies to discourage discrimination on the grounds of gender, caste, etc.?

Governance: Lastly, does the company comply with all regulatory norms related to pollution, carbon footprints, emissions, use of hazardous substances in products as well as financial transactions? Does it follow high standards in auditing and disclosures?

The rise and rise of ESG funds

ESG investing is big business around the world and is all set to get even bigger.

Even in India, ESG funds are rising in popularity. With uncertainties such as flash floods, cyclones, and of course the COVID-19 pandemic, there has been a newfound interest amongst institutional investors to direct a part of their funds toward sustainable businesses and business models from the ESG perspective. That perhaps explains a flurry of new ESG fund launches during the calendar year 2020 even as the COVID-19 pandemic continued to exert its devastating effect on economic activity in India.

How do ESG funds invest?
How do ESG funds select companies to invest in? Take the case of Axis ESG Equity Fund. The fund selects companies based on:

· Sector-level screening: The fund will not invest in companies involved in cluster munitions, anti-personnel mines, and chemical and biological weapons.

· Stock-level screening: The fund undertakes an ESG review for companies and there are no investments in stocks which throw up an ESG red flag.

· Portfolio construction: While each investment by Axis Mutual Fund is based on an existing fundamentals-based investment process, for the ESG fund there is a further detailed, qualitative ESG review. To know more you can download the fact sheet.

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