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You might not have heard much about ESG funds. However, they are an excellent investment option in mutual funds. We have covered the following in this article:
ESG is the abbreviation of environmental, social, and governance. Any organisation that is performing well today and hoping to maintain this development in future will have to be ESG compliant. ESG funds are those funds whose asset allocation mostly includes shares and bonds of companies that are evaluated based on the factors of environmental, social, and governance.
The ESG companies are assessed stringently on their sustainability before they are given the tag. The ESG parameters reflect on an organisation’s culture, the risk involved, and management, among other things. ESG funds are suitable for those that are looking to invest in companies that are sustainable and conscious about the environment. An organisation is said to be ESG compliant if it meets all the criteria of environmental, social, and governance standards. The ESG funds carefully evaluate companies and choose to invest in shares of those companies that are genuinely ESG compliant. India is becoming more conscious of pollution control and climate change. Companies that are strictly following all the steps to protect the ecosystem around its factories and outlets are not in the firing line of the regulators, and chances of being shut down are reasonably low. The possibility of the business being shut down is higher for those who do not abide by the set of rules and norms to protect the environment.
Apart from the regulatory, companies need to implement methods that are environment-friendly in their operations. This will help in their sustenance and at the same time, protect the ecosystem and its surroundings. The heart of any business is its employees. Organisations that are developed socially are known to treat their employees better with due respect. A few examples of this are; measures to keep away the occupational accidents, employee safety, treating employees of all backgrounds on the same lines, and not discriminating employees based on their gender. Besides providing a fair work-life balance to employees, socially responsible organisations take up CSR initiatives. A company doesn’t qualify to be governance compliant by just satisfying the requirements of audits and meeting the GAAP standards.
A company is compliant under governance if it is ethical in its financial disclosures and can sustain the highest governance standards. These companies are not worried about being shut down by the regulators for being non-compliant as they meet all the prescribed conditions. Therefore, investors are not to be concerned about investing in these companies.
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 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.
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.