Large companies and investments have been a driving source of changes in the society. Whether it is reduced use of plastic to protect the environment or inclusion of a diverse class of employees, businesses can be considered for investment for the values they stand for. In the recent past, we have seen instances where the ideology of the top management has also affected the performance of the company.
This goes on to show that many prefer to support businesses that are giving back to the society. If you are also a socially conscious investor who would like to screen the investment before putting money on it, you should consider ESG funds.
What is ESG?
The ESG (Environmental, Social, and Governance) criteria takes into account a company's responsibility towards:
Environment: Its practices towards energy use, waste production and management, pollution, treatments of animals (like testing products on animals) and conservation of nature at large.
Social: Relationships it maintains with employees, suppliers, customers and community where it operates. Does it volunteer to contribute to the local community with its CSR (Corporate Social Responsibility) activities? Does it hold high regard for the health and safety of its employees?
Governance: It examines the company's leadership and its practices towards executive pay, audit and shareholder rights. Is the accounting information being shared with the public and government true? Is the upper management involved in fraudulent or illegal activities for personal gains?
These areas are predominantly the basis for a mutual fund house and brokerage firm that offer ESG funds. This also allows investors to be able to contribute to the funding of a responsible business.
ESG in India
In April 2018, Kotak Mahindra became the first Indian asset management company to sign the UN-supported Principles for Responsible Investment (PRI), which is a global network of investors that attempts to integrate ESG practices into investment. A few more followed suit.
Later that year, SBI Magnum Equity Fund was changed to SBI Magnum Equity ESG Fund, a thematic fund that invests in ESG norms.
SEBI has categorized ESG funds under thematic funds and the diversification is limited to those companies that fall under the criterion. Companies involved in manufacturing alcohol, tobacco and cigarettes are ruled out of these.
In the previous month, Quantum India launched its ESG Equity Fund and the new fund offer ends on 5 July. An 80 to 100 percent of the asset allocation is in equity and equity-related instruments that follow the ESG criteria and it is an actively managed fund benchmarked to Nifty 100 ESG Total Return Index.
Investments in these are taxed like any other equity-linked mutual fund in India.
Socially responsible investments have become a significant part of the total global assets. Besides mutual funds, exchange traded funds (ETFs) are also offered globally.
The concept is yet to pick up in India and experts feel that they will only grab attention when these have significant monetary implications that impact the bottom-line because analysts as well as the media has long been focusing on quarterly results for guidance. For example, a company making solar batteries would be making losses and trading at cheaper rates when compared to a chemical or tobacco company that has not been able to do its bit in the environmental front.