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Rise in ESG Funds in India



You might not be aware of ESG funds. They are, nonetheless, an outstanding mutual fund investment option available.


The term ESG stands for environmental, social, and governance. ESG compliance is required for any organisation that is functioning well today and aspires to strive to do so in the long term. They are also known as sustainable funds. ESG funds are mutual funds that engage exclusively in stocks and bonds of firms that have been vetted for environmental, social, and governance factors. ESG investment has grown surprisingly popular in industrialized economies over the last decade, as seen by the increase in the number of funds and benchmarks dedicated to socially responsible investing, impact investing, sustainable investing, and so on.


Gaining a better understanding of ESG


Before being granted the ESG label, firms are rigorously evaluated for their long-term viability. The ESG criteria considers a company's culture, risk, and management, among other things. ESG funds are appropriate for people wanting to invest in firms that are environmentally conscientious and sustainable. Apart from the legal requirements, businesses must use environmentally friendly practices in their operations. This will aid in their survival, while also protecting the ecology and its surroundings. If a firm is ethical in its financial disclosures and can maintain the highest governance standards, it is compliant under governance. These businesses are unconcerned about being shut down by authorities for not complying with the rules since they satisfy all of the requirements. As a result, investors should not be apprehensive about investing in these businesses.


The Essence of ESG in Global Markets


The emergence of ESG funds may be traced back to 2005, when Kofi Annan, then-UN Secretary-General, asked a group of the world's top institutional investors to create the Principles for Responsible Investment (PRI), which focused on addressing ESG concerns. As a result, the PRI network was formed, which is now the world's foremost proponent of responsible investment. The PRI group's 521 members manage more than $103 trillion (as of March 2020) in accordance with ESG standards. Since the theme's debut in 2006, ESG assets have risen at a rate of around 22% each year. Climate change and inequality are more prominent in ESG. According to analysts, President Joe Biden's attention on climate change might enhance ESG funds in the near future.

Although ESG funds are new to Indian investors, there are over 3,000 of them accessible worldwide. This indicates a positive move away from a profit-at-all-costs mentality and toward long-term growth. Government organisations such as the Ministry of Environment, Forest and Climate Change and the Ministry of Labour and Employment have exercised some business supervision, but it pales in comparison to the global attention paid to the ESG issue. On the plus side, India became the first country in the world to make corporate social responsibility (CSR) essential for firms with a specific turnover and profitability, thanks to the Companies Act of 2013.


Investment in ESG Funds


To fulfil financial needs and long-term growth, the way is to go for investing in ESG Funds. It gives dual benefits; one is capital appreciation and other is showing your responsibility towards global issues. For companies, these investing plays a vital role, as it increases goodwill in long run, and helps them in getting equity and debt easily in comparison to other companies.

Currently, Reliance Industries in its AGM specified about ESG Investing, as it gives benefit in ensuring prominent presence in Nifty 100 ESG index and Nifty 100 Enhanced ESG index.

In fact, according to MorningStar — “In 2020, six ESG funds were launched in India. As a result, net inflows in ESG funds increased from Rs 22 crore in March 2020 to Rs 678 crore in March 2021.” While the ESG concept is new in India, a recognition of its significance has existed for some years.

When a real epidemic struck last year, the world's readiness for dealing with a pandemic-like crisis was found inadequate. This has bolstered the case for better handling of climate change issues, as the consequences would be more long-term and, in some circumstances, irreversible, with no immediate cure. As a result, ESG considerations are being given increasing attention from a risk-mitigation standpoint. In all, ESG funds would prove to be a game changer.

- Authored by Jyoti Golia and Ishu Chaudhary, Research Directors, SRCRC