ESG mutual funds explained in detail


ESG mutual funds have been long sought after by investors across Europe and North America, in most developed countries and economies.


In India they have gained attention from investors and momentum from Mutual fund companies in the form of new launches only in the past few years though.


ESG mutual funds invest in stocks from the same universe that other equity mutual funds invest in.


The difference lies in the reason for picking and not picking a particular stock.


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What are esg mutual funds?

ESG mutual funds are more concerned with how money is made rather than how much money is made, they are more concerned with a how a business makes profits rather than how profitable the business is.


A ESG mutual fund is not your traditional mutual fund scheme, it views companies from the ESG lens and therefore the parameters and filters for it are not the same as other mutual fund schemes.


ESG mutual funds are built and run on the following three pillars:

 

Environment

The fund reviews and judges a company based on:

  1. Its carbon emissions if any
  2. Its positive contribution to climate change
  3. How efficiently it uses the natural resources
  4. Water and waste management.


The fund does not expect chemical or refinery businesses to all of a sudden stop using water but it does expect such businesses to use water more efficiently and only release effluents into a natural body of water after it has been treated well.

 


Additional reading: Click Here to read about the various Types of Mutual Funds 



Social

The fund reviews and judges a company based on:

  1. Labour management
  2. How it treats its customers
  3. Diversity at the workplace
  4. Gender diversity
  5. Its positive involvement and contribution to society at large
  6. The stand in takes on social issues


The stand the company takes on socially relevant issues has a big say in whether customers want to see themselves aligned or associated with the company.

 


Governance

The fund reviews and judges a company based on:

  1. It’s Whistleblower policy
  2. Bribery and corruption policy
  3. Diversity and composition of its board


Any irregularities with the numbers reported, financial fraud does not show the company in good light. This not only affects the share price of a company but also puts all the stakeholders in a position where they are compelled to review their decision to be associated with a company they feel they cannot trust. 

 


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ESG Mutual Funds Investing strategy

ESG mutual funds are more concerned with what companies get right rather than what they get wrong.


The idea is to pick companies that meet certain standards that have a positive impact on the environment in every aspect and thereby a healthy outlook for the company too.


If a company has been fined by the environmental authorities for releasing unfiltered effluents into the waters then it would affect the stock price negatively too.


Other examples would include unfair working conditions and any corruption or bribery charges levied against it.


All these events affect everyone related to the company including the shareholders and overall the environment in every aspect.


ESG mutual funds try to avoid these companies and therefore there is better downside protection which is as important as upward movement in share prices.

 


Features of ESG mutual funds

ESG mutual funds are as concerned with the ethical side of business as they are with the financial side.


They do not prioritise one over the other.


ESG mutual funds go and look beyond the numbers for statistics have an uncanny ability to conceal what needs to be revealed.


These funds though not a new idea globally are all about accountability, from everyone and not just one or a group of people because the environment affects us all.



Additional reading: Click Here to read our complete report on everything that you should know about a Mutual fund NAV.



Need for ESG mutual funds

Coronavirus has given the entire world more than enough to take note of why how doing business is as important as how much business is done and profits made.


Climate change is real and it’s only going to get worse until and unless each and every individual is on the same page.


Every year we read about a flood crisis in some part of the country or the other.


Air pollution has been an issue in most major cities of our country.


The younger generation is not only worried about its own future but that of the coming generations too and therefore demands accountability from how the companies they invest in make money.

 


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Advantages of ESG mutual funds

ESG mutual funds tend to be less volatile than other mutual funds since they refrain from investing in companies, they believe are not transparent or run the risk of financial malpractices among other things.


The strong filtering process makes sure the fund only invests in sustainable businesses that provide long term growth while complying with all the necessary standards.


They are more favourable to investors that look for overall growth and not merely on the financial side.

 


Disadvantages of ESG mutual funds

Because of the stringent filtering process, the fund has a limited universe from where it can pick which companies to invest in and which to avoid.


This makes for a very focused portfolio and thereby the fund does not get the privilege of as much diversification as say other equity mutual funds.


ESG mutual funds cannot be the core portion of your mutual fund portfolio since at the end of the day they are still thematic mutual funds.


These funds may not always work in a bull market since they may have to overlook certain companies and sectors that do not meet the ESG requirements.

 

      India as an economy is still dependent for foreign investment and since ESG is not a novel idea abroad, foreign investors would in time as the idea picks pace in India also look for companies that adhere to the ESG standards.


    This is a win win situation for both the economy specifically and the overall environment generally.


    Companies would be encouraged to run their businesses in a more environment friendly manner that would be beneficial to both the current generation as well as the forthcoming generations.


 Our environment is deteriorating every day and therefore sustainability no more remains a fancy word or a battle only a few can pick and even investors around the globe no more shy away from the need to hold themselves accountable.

 



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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
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