The growth of ESG (Environment, Social, and Governance) funds in India has been remarkable in recent times. The asset size of these sustainable investments is reported to have expanded almost five-fold, reaching Rs 12,300 crore within a few years. There is an increasing demand for ESG funds, particularly in Asia, with India seeing a growth rate of 32%.
Understanding ESG Funds
ESG funds are a type of Mutual Fund that focuses on the principles of sustainable and responsible investing. Unlike traditional mutual funds that primarily concentrate on potential earnings, management quality, cash flows, and competition, ESG funds prioritize companies based on their performance in environment-friendly practices, social responsibility, and corporate governance. Only once these criteria are met do they consider financial factors. Hence, the distinguishing factor between ESG funds and other funds is the ‘conscience’ of the investment. The Securities and Exchange Board of India (SEBI) regulates these funds.
Factors Driving the Growth of ESG Funds
Several factors contribute to the growth of ESG funds. Among them is a greater focus on policies around cleanliness, skill development, healthcare coverage, and education. This suggests a potential increase in public investment in sectors that are socially and environmentally sensitive. Additionally, younger investors are becoming progressively aware and understanding of the impact of business practices on social development and the environment. This shift in perspective is re-shaping traditional investment approaches. The United Nations Principles for Responsible Investment (UN-PRI), an international organization, encourages this shift by promoting the inclusion of ESG factors in investment decisions.
The Significance of ESG Funds
As ESG funds gain traction in India, they play a crucial role in encouraging companies to adopt improved governance and ethical standards. Companies are increasingly being urged to act with greater social and environmental responsibility. If companies neglect to modify their business models or strive for environmental sustainability, they risk damaging their revenue and profits in the long run. Globally, many pension funds and sovereign wealth funds avoid investing in companies seen as socially irresponsible or polluting.
Concerns Associated with ESG Funds
Despite the positive impact of ESG funds, there are also concerns associated with this form of investment. Greenwashing, the practice of misleading consumers into believing a company’s products are environmentally friendly, is one of the primary concerns among global institutional investors. Additionally, some investment experts warn of a tendency among fund managers to overweight certain stocks and businesses. This can occur when large investment-friendly companies fail to meet the qualitative and quantitative parameters used for ESG investing.
