ESG Funds

• 24 Dec 2021

For Prelims: ESG Funds, Corporate Social Responsibility.

For Mains: Growth of ESG Funds in India, its significance and concerns associated with it.

Why in News

The asset size of ESG (Environment, Social and Governance) Funds has grown nearly five times to Rs 12,300 crore over the last couple of years.

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

Key Points

• About:
  
  • It is a kind of Mutual Fund. Its investing is used synonymously with sustainable investing or socially responsible investing.
  • Typically, a mutual fund looks for a good stock of a company that has potential earnings, management quality, cash flows, the business it operates in, competition etc.
  • However, while selecting 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.
  • Therefore, the key difference between the ESG funds and other funds is 'conscience' i.e the ESG fund focuses on companies with environment-friendly practices, ethical business practices and an employee-friendly record.
  • The fund is regulated by Securities and Exchange Board of India (SEBI).
• 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.
• Significance:
  
  • As ESG funds gain momentum in India, companies will be forced to improve governance and ethical practices, and act with greater social and environmental responsibility.
  • As the policy framework changes, companies that do not alter business models or become more environmentally sustainable, could have their revenue and profits impacted in the long term.
    
    • Globally, many pension funds and sovereign wealth funds do not invest in companies that are seen as polluting or socially not responsible.
• Concerns:
  
  • Alongside the greater attention on issues such as climate risk, emissions, supply chains, labour rights, anti-corruption, etc., certain concerns have been flagged as well.
  • Greenwashing is one of the top concerns among global institutional investors.
    
    • Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company's products are environmentally friendly.
  • Investment experts have also pointed to the tendency of fund managers to overweight 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: IE