ESG Funds- Environment Social and Governance Funds

Context:

The demand and growth for ESG funds in Asia, especially in India, has been overwhelming, it is 32%.

About ESG Funds

• ESG investing means sustainable investing or socially responsible investing.
• To select a stock for investment, the ESG fund shortlists companies that score high on environment, social responsibility and corporate governance, and then looks into financial factors.
• It focusses on companies that have high environment-friendly practices, ethical business practices and an employee-friendly record.
• ESG funds use parameters such as greenhouse gas and carbon emissions, and employment generated to assess the ESG impact of the companies.

Which companies gets priority vs Which companies loose out?

• Companies like those in the technology, renewable energy, healthcare, and FMCG (Fast Moving Consumer Goods) space feature heavily in these portfolios.
• While, companies with higher carbon footprints such as tobacco manufacturers, coal miners, oil and gas companies, and fossil fuel-based power generators do not find much space in ESG fund portfolios.

The Essence of ESG in Global Markets

ESG companies have global significance as one-third of the total USD 22.9 trillion assets under management around the globe is socially responsible investment. Blue bonds which fund oceanic protection, green bonds which fund energy-efficient developmental projects, ESG themes ETF (exchange-traded fund), and environmental impact bonds are launched in the recent years.

The Essence of ESG in the Indian Market

The demand and growth for ESG funds in Asia, especially in India, has been overwhelming; it is 32%. In India, people are becoming more interested in sustainability due to several parameters. Factors such as regulatory requirements have played a significant factor in pushing the companies to be ESG compliant. In fact, there are instances of organisations being shut down for not abiding by the laws. Therefore, many companies have become ESG compliant after knowing the consequences of not being so. Apart from the regulatory requirements, another factor influencing the companies to be ESG compliant is the interest of foreign investors. Foreign investors are becoming more interested in those companies that are sustainable and ESG compliant.

Way Forward for ESG in India

With regulators becoming more stringent every day, the steps that a company must take to be ESG compliant is going to get more robust in the days to come. This included environmental norms and social impact. The regulators are going to be tough on those organisations that are not following the regulations and is sure to impose penalties. A significant advantage that an ESG compliant company gets is that they will be on the safer side when the regulators come up with even more stringent rules. These companies would be in a comfortable position as they have to take a few measures to meet the requirements than the non-compliant ones who have to start from scratch.

Also, the scope for the ESG compliant companies to gain significant market share would be more as their non-compliant competitors would be struggling to comply with the norms. Being ESG compliant enhances the company’s credibility and reputation several folds and is sure to attract investors due to their sustainability.

Factors Behind ESG Growth:

• 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.
• Modern investors are re-evaluating traditional approaches, and look at the impact their investment has on the planet. Thus, investors have started incorporating ESG factors into investment practices.
• The United Nations Principles for Responsible Investment (UN-PRI) (an international organization) works to promote the incorporation of environmental, social, and corporate governance factors into investment decision-making.

ESG funds issue

• ESG funds, in the absence of clear guidelines, can lead to “greenwashing”.
• Greenwashing is an act of conveying a “false impression or providing misleading information about how a company’s products are more environmentally sound”.
• World Economic Forum has also noted that greenwashing is a top concern among global institutional investors.
• Moreover, the experts have also argued that fund managers often tend 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.

Source: Indian Express

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