ESG funds is a lesser known mutual fund type. Nowadays many investors are shifting towards this approach. The meaning of this type of funds lies behind three words. They are Environment, Social (society) and Governance. These types of funds have special criteria for picking up companies in their portfolio. They prefer companies which are environment friendly and serve the society well. They prefer companies who work as per the law structure and abide by every financial regulation. The fund managers specifically look out for these three criteria’s before picking up companies.
Why The Three Criteria’s ?
The managers of various ESG funds believe that this is the future of mutual funds across the globe. They present forward a very simple explanation regarding this view. The only word they are looking forward to is LONGEVITY. These funds take companies which have the ability to sustain for the long term.
“E” is very important for any company. The reason is any company which provides maximum environment friendly products or is creating lesser or zero pollution then it has the ability to sustain for a long time. The reason is such companies can stay out of the eyes of the regulators for any obstruction in their activities. Also the locals as well as the government bodies support the company.
Social aspects include Society at a broader level and employees at a smaller and arrow level. The employees are the first family and the heart of any company. They are responsible for maintaining and running the company on a daily basis. The employees not only fulfill the requirements of their work but also build the company from the scrap. Without a team a company cannot survive and grow beyond a certain level. Hence this factor is one of the most important criteria to look at.
The investors comment that a company which has a well developed and united team can grow again and again even if it loses everything. Hence the managers of ESG funds look after companies which have an excellent pattern of working to maintain the work-life balance. The managers also focus on the benefits the employees get from the company apart from the salaries and bonuses. They also focus on the happiness level of the workforce within the company. If a company takes care of its employees then it takes a small step into developing one community of the society for a long time.
The governance factor is the deciding factor for the managers while picking up the companies. The reason is the more the company is transparent and involved in fair business, the less are its chances for getting involved in any scam or illegal activities. This factor refers to working as per the rules and regulations of the nation. The company should not only adhere to the general rules of auditing and finance but should be true and fair about the disclosure of its income and profits. This transparency wins the trust of fund managers and investors. They become reliant about the fact that the company world ethically and would never hide any facts from its shareholders.
Why ESG Funds Were Created ?
The current situation of the world under pandemic is very miserable. There was a time period for almost 5 to 6 months where the work was totally stopped and no one can get involved into any business as well. Also from 2017 there have been news of Glacier melting or forest fires or climate cycle disruption. All this is the byproduct of the pollutants extracted from manufacturing units of the big companies. The products undoubtedly are important for human existence but either the pollution can be reduced through better methods of production or it could be substituted by developing forests and tree plantation programmed.
Also due to such stage of disruption a new fund came into existence.it looked after the environmental and societal concerns of today’s time and picked up the golden companies who are doing excellent in the above mentioned three criteria’s. Hence the ESG funds came into existence due to such reasons. Today the situation is such that fund managers are terming it to be the future of mutual funds due to its depth of company selection. It involves societal, nature and financial factors while adopting a company into a portfolio.
Also one should be reliant while investing into such portfolios as the companies would never get out of business in the short run. The reason is to complain about government rules along with maintaining the employee force and working in an eco-friendly manner. This helps to increase the longevity of the company. It also adds the sustainability factor into the selection criteria.
Can ESG Funds Sustain In Indian Markets ?
Yes, of course. Such funds can work very well into the Indian economy. The reason is over populated nations and more production of pollutants by companies. India has a huge amount of population which results in more demand for goods and services. For meeting their needs more production is required which in turn generates more pollution. Hence the simple calculation adds up to the awareness factor among people. Nowadays people have understood that they need to prevent nature and respect the environment cycle as well. Hence many big companies are picking up green projects as well. The investors as well the companies have become aware that they need to sustain nature to get advantage of its resources in the long run. This would be possible only if the companies work in an eco-friendly manner.
Also as per a simple logic the rules of government are going to get stricter day by day. Hence the companies which work in a legal and justified manner would be having an upper hand as compared to the competitors with lower standards of work. Last reason is that a better working environment creates more opportunities. Employees prefer better working conditions along with better opportunities.
So adding up these factors the ESG funds have a great future in Indian domain. The Indian public is getting aware about the environmental problems and the investors are also supporting the companies who work in a sustainable manner. So ESGs bring awareness to the companies that they have to adopt maximum standards of work and eco-friendly pattern of production.
With the size of Indian population these funds may take a high rise in demand in near future adding the COVID situation and climate disruptions around the world.
What are some famous ESG funds in India ?
- Aditya Birla Sun Life ESG Fund – It was initiated in Dec. 2020 and aims to invest major 60 to 80 % of its resources into large caps.
- Axis ESG Fund – It began just before the COVID lockdown in Feb, 2020. The fund currently holds more than 52 companies under its domain. Its major holdings lies into HDFC bank, ICICI bank, D-Mart and TCS.
- ICICI Prudential ESG Fund – the fund began around Oct, 2020. It has more than 30 companies under its portfolio. The major holdings lie in HDFC Bank, Kotak Mahindra Bank, Reliance Industries Limited and Infosys.
- Kotak ESG Opportunities Fund – The fund was initiated in Dec, 2020. The fund wants to cover more than 40 – 60 companies into its portfolio. It aims to work the ESG model and its BMV (Business, Management and Valuation) model together for picking up the companies.
- SBI Magnum ESG Fund – The fund began in May 2018. It has more than 39 companies in its portfolio. The major holdings are HDFC Bank, TCS, Reliance Industries Ltd. and Infosys.