While investing one should not only evaluate the companies based on their financial parameters but also on the basis of several non-financial parameters. Amongst the non-financial parameters, the ESG can be considered a good starting point. Amid the pandemic, the ESG index funds hit a record $250 billion.
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What is meant by ESG?
ESG stands for Environment Empathy, Social Responsibility and Corporate Governance. These parameters are used as filters for the investments in stocks. In simple words, ESG investing is sustainable or socially responsible investing.
The ESG fund shortlists the companies which rate high on the environment, social responsibility and corporate governance. In other words, the scheme focuses on those companies which have environment-friendly practices, ethical business practices and an employee-friendly record.
How ESG investing works?
Like any other funds, the investors make investments in the ESG funds. The experts of the ESG funds will then invest your money in different companies which meets all three--Environment Empathy, Social Responsibility and Corporate Governance. Here, the fundamentals and financial parameters are secondary.
Are ESG funds available in India?
Yes, the ESG funds were launched by the State Bank of India under the SBI Magnum Equity ESG Fund. Since its launch by the SBI, other lenders are also offering ESG Funds-- ICICI Prudential ESG Fund, Axis ESG Equity Fund, Quantum India ESG Equity, etc.
As of now, there are three ESG funds schemes in India. These are as follows:
1- SBI Magnum Equity ESG Fund (Rs 2,772 crore).
2- Axis ESG Equity (Rs 1,775 crore).
3- Quantum India ESG Equity (Rs 18 crore)
A new addition to the list is ICICI Prudential ESG Fund. Kotak Mahindra AMC is expected to be the next in the list. The concept of ESG funds is new to India but it is gaining much popularity in the Indian mutual fund industry.
Why there's a craze in ESG investing?
ESG investing is not a newer concept but is reaching a new high amid the global pandemic. This is because modern investors are more concerned about the impact that their investment will have on our planet. Thus, to attract more investors, the fund houses have started incorporating ESG parameters.
Do the ESG compliant companies give good returns?
Yes, the ESG compliant companies give good returns in comparison to ESG non-compliant companies in the long term. This is because the ESG non-compliant companies may face a higher cost of capital, higher volatility due to controversies, labour strikes, frauds and other irregularities impacting the companies.
Will it bring any change?
As per several experts, this will bring revolution in the companies as they will be forced to follow better governance, ethical practices, environment-friendly measures and social responsibility to attract the investments.
What is meant by Environment Empathy?
It is known that due to global warming the glaciers are melting and the average temperature is rising globally. Also, green cover is reducing rapidly, air and rivers are getting polluted. However, this is not the end. We can still protect our environment by switching to renewable sources of energy, increase in green cover, improving waste management practices and treating the air and water pollution. This process of saving the environment is known as Environment Empathy.
What is meant by Social Responsibility?
We all know that corporates use raw materials and manpower from the area in which they operate to keep their businesses running smoothly. Thus, it is expected that the companies use these resources in a fair, just and socially responsible way.
What is meant by Corporate Governance?
Corporate Governance is all about integrity and honesty of the management for sustainable growth. For this purpose, SEBI keeps on regulating the policies to be followed by the listed entities.
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