What is ESG Funds ? Why are they popular ?

 What is ESG Funds ? Why are they popular ?

Introduction::

👉When it comes to investigate, as a responsible citizen, one should evaluate our target companies not only based on financial parameters. But also on the basis of certain non financial parameters.

👉For the non financial parameters, ESG (Environment Empathy, Social Responsibility and Corporate governance) can be considered as a good starting point.

Environment Empathy (E)

👉The melting glaciers, rise in average temperature globally have brought before us the pitfalls of global warming. The fast reducing forest cover, major rivers getting polluted and higher presence of pollutants in air are all examples of ways mankind is neglecting the environment.  Measures such as switching to renewable energy, increasing green cover, better waste management and pollution treatment are all ways in which one can protect the environment.

Social responsibility (S)

👉For running their business, corporates draw raw material and man power from the area in which they operate. While engaging with these resources, it is fair to except the companies to handle resources in a fair, optimal and in a socially responsible manner.The Companies act 2013 mandates spending 2% of net profits towards social responsibility causes.

Corporate Governance (G)

👉Corporate governance is all about integrity and honesty of the management.This aspect also has the potential to adversely impact investor's wealth creation prospects in the long run. Market regulator SEBI has from time to time brought about regulations to be adhered  to by listed entities. History has time and again shown that strict adherence to good policies result into sustainable growth.

What is ESG investment ?

👉It looks three crore areas: Environment, Social responsibility and Corporate governance. So while picking up a stock for investment, the ESG fund first shortlists companies that score high on these three parameters. Then look into the fundamentals and financial factors in its investment decision making process. So the scheme will focus on companies that adopt Environment friendly practices, follow ethical business practices and are employee friendly among others.

Why is there so much focus on ESG and what about return ?

👉Fund houses say that modern investors are re evaluating traditional investment approaches and when they invest, they look at the impact it is having on the planet as a whole. This paradigm change is forcing corporations, investment companies and asset managers to realise that investors are no longer only worried about returns. As a result, asset managers have started incorporating ESG factors into the investment practices.

👉Even on the performance front, fund managers say globally, ESG non compliant companies tend to perform poorly over the long term due to issues such as higher cost of capital, higher volatality due to controversies, labour strikes, accounting fraud and other goverance irregularities.