How to select funds according to the ESG theme
The theme was initially driven by institutional investors, but is also gaining ground among retail investors. There are around 10 funds to choose from in India, depending on factors such as active or passive funds, invested in Indian or global stocks.
ESG funds are mutual funds calibrated on the basis of environmental, social and governance proposals. “ESG funds invest in companies that aim to have a sustainable and societal impact in the world, such as those with a low carbon footprint or diverse boards of directors. An ideal fund would be one that invests in companies that succeed in these proposals while ensuring that an investor does not compromise their returns, ”said Priti Rathi Gupta, Founder of LXME, a financial platform for women.
On this World Environment Day, we explain to you why this theme has resumed and its perspectives in the Indian context.
Why ESG funds have picked up
Private investors have found that investing in companies with a strong and convincing ESG strategy has a positive effect on return on investment, reduces credit and income risks.
In addition, ESG principles guide companies towards a better and more efficient use of resources, both natural and man-made. This allows businesses to sustain themselves longer with the same limited resource pool.
“ESG funds play an important role in making companies aware of these aspects by avoiding investing in companies or sectors where the underlying risks in companies due to failure to comply with factors E, S or G are high and by engaging with companies increase awareness levels, ”said Amit Nigam, Fund Manager, Invesco Mutual Fund.
The crisis caused by the covid has further accelerated the demand for sustainable investments. While still in its infancy in India from an ESG fund perspective, the launch of ESG funds has raised awareness among investors.
“Many national asset managers already integrate ESG principles into their overall investment framework. Indian companies are also increasingly recognizing the need to effectively manage ESG factors as a means of effectively managing business risks and attracting long-term capital from investors who increasingly take ESG factors into account to consider investment decisions ”, said Kaustubh Belapurkar, Managing Director. Research, Morningstar India.
Low environmental score
There are concerns that in India many leading companies score low on the environmental aspect, which is then offset by good social and governance scores. Some of the large companies with a low environmental score are a factor in the industries in which they operate.
“The use of natural resources by industries and the resulting emissions are the main reason for these poor scores. In our rating methodology, we integrate these aspects and try to differentiate between companies that strive to mitigate this risk by improving their processes, using natural resources more efficiently, reducing emissions, etc. Nigam said.
On the other hand, there are examples of companies that scored well on the environmental side, but damaged shareholder returns due to poor governance practices.
“Our experience with ESG principles suggests that one should take a holistic approach when assessing a company’s ESG risk profile,” added Nigam.
Are ESG funds right for you?
According to experts with reduced risk, investors in such funds should benefit from better risk-adjusted returns in their portfolios in the medium and long term.
A strong ESG proposition can help create business value across the organization. “Sustainable online practices attract more customers, allow better access to resources, reduce energy and water consumption and therefore can also lower operating costs. S-sustainable practices lead to greater social credibility, attract talent, boost employee morale and strengthen relationships with the community. While G-sustainable practices can lead to government support, subsidies, overcoming increasing regulatory pressure and better relations with investors, for example in the form of better lending terms or lower investment costs ”Gupta said.
According to Nigam, investors in a company will benefit from this extended lifespan because the course of capitalization of shares in the company can continue for longer.
Top rated funds
ESG funds in India are still in their infancy, but those that have been around for over a year have shown impressive returns. According to Morningstar India, the highest rated ESG funds are Aditya BSL ESG, Axis ESG Equity, ICICI Prudential ESG, Invesco India ESG Equity and Kotak ESG Opportunities.
In terms of the environmental aspect, the information technology and financial services sectors tend to score higher, as these companies have limited direct physical interaction with the environment.
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