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Environmental awareness is rising as an increasing number of people wake up to the importance of sustainable practices. This is also being reflected in the way institutions – and retail investors – invest their funds. Over the past two decades, there’s been one buzzword that has been steadily getting louder – and that word is ESG investing. Perhaps you’ve heard of it, or perhaps, if you’re a beginner investor, this is the first time you’re learning about ESG investing. Whatever the case may be, here’s a closer look at what this trend entails.
An acronym for environmental, social and governance related factors, ESG investing is a practice that involves selecting stocks and funds to invest based on how the practices and the policies of the businesses behind them affect the environment, the society and the planet, among other things. It involves weighing the ethical and sustainable aspects of a business before deciding to put investors’ money on them. It’s for this reason that ESG investing is often referred to as ethical investing or green investing.
ESG funds are essentially mutual funds that invest in a portfolio of stocks and/or bonds of companies after considering the environmental, social and governance factors in the decision-making process. These funds invest in the assets of companies that have fared well on the ESG scale, making them ethical investments that would eventually have a positive impact on the environment and the society. For individual investors who are keen on making socially conscious investments, including ESG funds in the investment portfolio is a good strategy to consider.
If you’re contemplating investing in ESG funds, then it’s essential that you know the details of what this investment practice entails. Here are some things you need to know before adding ESG assets to your investment portfolio.
Several countries across the globe are getting more serious about environmental concerns like climate change and conservation of natural resources. This is reflected in ESG investment practices, since the environmental repercussions of the policies of the companies behind the stocks are weighed before investors choose such assets.
So, a company’s carbon footprint, contribution to pollution, waste management policy, water usage, green energy initiatives, etc., are heavily scrutinized and as a result, companies that adopt sustainable business practices tend to fare high on this scale.
ESG funds and stocks are also selected and put together after weighing the social impact of the business practices employed by the companies in question. This includes aspects like employee safety measures, fair treatment at the workplace and socio-economic initiatives that companies implement as a part of their Corporate Social Responsibility drive. ESG investment takes into account all such criteria before deciding on whether a company is socially conscious.
The ESG investment segment is a rapidly growing area in the Indian market. One of the earliest signs of a shift in the investment rationale occurred in 2011, when the NIFTY 100 ESG index was introduced in the market. In the years since, the NIFTY 100 ESG index has recorded a return of 10.6%, while the corresponding figure for the traditional NIFTY 100 index comes in at 9.1% only. It is estimated that currently, the assets under management for ESG funds is around $650 million in India. Clearly, this is a quickly emerging segment that you will no doubt want to include in your investment portfolio.
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In this segment, companies are judged based on how they fare with respect to governance-related factors like company’s integrity, financial disclosures, adherence to regulatory requirements, political contributions, accountability to shareholders, diversity in leadership, etc. Companies that do not conform to the governance requirements applicable to them are generally considered as poor ESG investments. Those businesses that adhere to governance and regulatory laws and ensure that they remain legally compliant are good options to consider.
One way to go about investing in an environmentally, socially and governance conscious manner is to evaluate these factors yourself. A more efficient way to go about adding ESG investments to your investment portfolio is to opt for ESG funds, which are quickly being added by the dozens to the existing investment options in the Indian financial markets. These funds, which are managed by professional fund managers, are ideal options for beginner investors as well as for other retail investors who prefer to enlist the help of experts.
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Most asset management companies have their own criteria to rate companies on the ESG scale. Companies are analysed and rated before they can be considered socially responsible investments. Let us look at some of the impacts of such sustainable investing:
Investors decide a company’s future with money, much like voters with their votes. When more investors believe in and support companies that follow sustainable and ethical practices, these companies grow. This also motivates other companies to revise their policies and practices to align themselves with the market interest. So when more people opt for socially responsible investments, the companies will evolve to meet the market expectation.
When companies follow ethical and legal guidelines, there are lesser chances of negative press or blown-up scandals that damage a company’s reputation. So with sustainable investing, investors can rest assured that the company’s stock price won’t suffer drastic downfalls from such revelations.
Sustainable living is the future. So with sustainable investing, investors can get better returns in the longer run. Companies benefit from cost reduction, increased employee productivity, and better growth when they invest in ESG practices. So investing in such companies will be less risky and provide better returns.
If you’re keen on adding some ESG funds to your investment portfolio, then Tata Capital Wealth has some excellent choices for you. Our Focused Funds in this category, like the ICICI Prudential ESG fund, the Aditya Birla Sun Life ESG Fund, and the Mirae Asset ESG Sector Leaders Fund of Funds are both worth considering if you wish to diversify your portfolio and add some ethical investments to it.
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