ESG (Environment, Social and Governance) Funds

In news- The asset size of ESG funds has ballooned nearly five times to Rs 12,300 crore over the last couple of years.

About ESG funds-

ESG funds are those funds whose asset allocation mostly includes shares and bonds of companies that are evaluated based on the factors of environmental, social, and governance.
ESG funds are suitable for those that are looking to invest in companies that are sustainable and conscious about the environment.
The term ESG investing is used synonymously with sustainable and socially responsible investing.
While selecting a stock for investment, an ESG fund shortlists companies that score high on environment, social responsibility, and corporate governance, and then looks at financial factors.
Recently, the National Stock Exchange (NSE) launched NSE Prime, a framework that allows companies to submit to standards of corporate governance that are higher than those required by existing regulations.
Most top fund houses, including SBI Magnum Equity, Aditya Birla Sun Life, ICICI Prudential, Quantum India, Kotak Mutual Fund, and Axis Mutual Fund offer ESG investment opportunities. Because this is a niche area, the fund houses have set the expense ratio of their ESG funds in the higher range.
ESG funds use parameters such as greenhouse gas and carbon emissions, and employment generated to assess the ESG impact of the companies.
Thus, companies with higher carbon outputs such as tobacco manufacturers, coal miners, oil and gas companies, and fossil fuel-based power generators typically do not feature in ESG fund portfolios.
On the other hand, companies in the technology, renewable energy, healthcare, and FMCG space feature heavily in these portfolios.
However, the area of concern is “greenwashing”, understood as an act of conveying a “false impression or providing misleading information about how a company’s products are more environmentally sound”.