An elaborate explanation of ESG funds

An elaborate explanation of ESG funds

We have some or the other time heard of ESG funds in the finance industry. To put it in simple terms, ESG funds are the Environmental, Social and Governance focused funds, which are actual a set of benchmarks that are set for a company’s operations so that those investors who are socially conscious ca use this as a criterion to scrutinise the potential investments. It tells the investor and any person who wishes to know, how the company is actually performing as a liaison of the environment or the nature, what steps it is taking to manage the relationships with their customers, suppliers, vendors, employees and also the people in places that they operate. The governance part paints a clear picture of the leadership within the company, payment of executives, controls of internal systems and the recognition of the rights of the shareholders. This is a very popular criteria used by the investors to ascertain whether they want to invest in a particular business or not.

Younger investors, in recent times have been showing a keen interest in investing their money in places that vibe with their values. This is the reason that companies such as the brokerage and mutual funds have started offering ETFs (Exchange traded funds) along with other bundles that sync with the ESG criteria. This ESH investing is also known as sustainable investing, impact investing, socially responsible investing or just responsible investing. The word ‘responsible’ holds big importance since the whole point of ESG funds in India or anywhere else in the world is about being responsible for your investments into anything.

If one thinks practically, then you will realise that there is no company that will actually pass this test of criteria for all the three categories. Therefore, companies that are investing, or the individual investors will have to determine which part or which category do they actually want to give importance to. the investors need to set their set of priorities before-hand.

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So, what exactly are the benefits of ESG funds, and do they have a down side to them?

Well, in recent past, these ESG funds or the responsible investments have been known to have trade off as a requirement on the part of the investor’s as they are the ones who did limit companies eligible for investment and investor’s potential too. companies that were termed as ‘bad for investment’ did prove to perform well in their business later, in terms of stock prices.

However, in recent years, more and more investors have started to believe that this ESG funds criteria could really have practical applications that go way beyond just ethical concerns. If they do follow the ethical criteria of the ESG funds, then they could avoid investing into a business or companies whose practices might bare some risk factors, just like the pol spill in 2010 of BP and emissions scandal by Volkswagen which led to stock prices of these companies taking a major hit. As the ESG practices of businesses are gaining gradual pace, professional investment firms are tracking their performances too.

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