ESG Funds: Environmental Social and Governance Funds

Table of Contents

ESG funds: Relevance

The asset size of ESG funds has increased to nearly five times over the last couple of years. Also, recently, National Stock Exchange (NSE) has launched NSE Prime to submit to standards of corporate governance.

NSE Prime is a framework that allows companies to submit to standards of corporate governance that are higher than those required by existing regulations.
The framework is stricter than the SEBI (Listing Obligations and Disclosure Requirements) Regulations.
Key requirements for companies to qualify for NSE Prime are
- A minimum 40 per cent public shareholding;
- mandatory segregation of the posts of chairman and CEO;
- independent directors as chairpersons of the risk management, stakeholder relationship, nomination remuneration, and audit committees.

ESG investing means sustainable investing or socially responsible investing.
To select 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.
It focusses on companies that have high environment-friendly practices, ethical business practices and an employee-friendly record.
ESG funds use parameters such as greenhouse gas and carbon emissions, and employment generated to assess the ESG impact of the companies.

Companies like those in the technology, renewable energy, healthcare, and FMCG (Fast Moving Consumer Goods) space feature heavily in these portfolios.
While, companies with higher carbon footprints such as tobacco manufacturers, coal miners, oil and gas companies, and fossil fuel-based power generators do not find much space in ESG fund portfolios.

Houses like SBI Magnum Equity, Aditya Birla Sun Life, ICICI Prudential, Quantum India, Kotak Mutual Fund, and Axis Mutual Fund offer ESG investment opportunities in India.

Companies like chemical and refining are needed for undertaking various operations. ESG funds advocates that these companies need to operate responsibly, utilise the technology available, effluent treatment, should not discharge untreated waste in soil, water or air, and should also take care of their minority shareholders and society.

Greater policy focus on subjects like cleanliness, skill development, health, and education indicate potential public investment in these sensitive sectors of the economy.
Younger investors also have become more aware about the impact of business on social development and environment.
According to experts, companies that are part of the ESG or NSE Prime will not only abide by the regulations and benefit from it in the long term, but will also have a better reputation and potentially command a premium on valuation in the long run.

ESG funds, in the absence of clear guidelines, can lead to “greenwashing”.
Greenwashing is an act of conveying a “false impression or providing misleading information about how a company’s products are more environmentally sound”.
World Economic Forum has also noted that greenwashing is a top concern among global institutional investors.
Moreover, the experts have also argued that fund managers often tend to over-weigh 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.

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