- The asset size of ESG funds has ballooned nearly five times to Rs 12,300 crore over the last couple of years.
- Environment, social responsibility, and corporate governance have of late emerged as key themes for investors in India.
- The demand and growth for ESG funds in Asia, especially in India, has been overwhelming, it is 32%.
What are ESG Funds?
- They are used synonymously with sustainable and socially responsible investing.
- While selecting a stock for investment, an ESG fund shortlists companies that score high on environment, social responsibility, and corporate governance, and then looks at financial factors.
- With the overall increase in awareness, and with regulations moving in this direction, investors are re-evaluating traditional approaches and considering the impact of their decisions on the planet.
- 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.
- The fund is regulated by Securities and Exchange Board of India (SEBI).
- The companies will be forced to improve governance and ethical practices, and act with greater social and environmental responsibility.
- As the policy framework changes, companies that do not alter business models or become more environmentally sustainable, could have their revenue and profits impacted in the long term.
- Globally, many pension funds and sovereign wealth funds do not invest in companies that are seen as polluting or socially not responsible.
Reasons Behind ESG growth
- The 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.
- The companies that are part of the ESG or NSE Prime will not only be on the right side of regulations and benefit from it in the long term, but will also have a better reputation and potentially command a premium on valuation in the long run.
Areas of concern
- Alongside the greater attention on issues such as climate risk, emissions, supply chains, labour 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 over-weigh 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."