The mutual fund industry in India is witnessing a significant shift towards environmentally-conscious investing with the increasing popularity of ESG (Environment, Social, and Governance) funds. The latest to enter this space is ICICI Prudential Mutual Fund with its ESG fund offering. Notably, the first ESG mutual fund was launched by the State Bank of India – SBI Magnum Equity ESG Fund.
Understanding ESG Funds
ESG funds are an innovative type of mutual funds that take into account environment, social responsibility, and corporate governance considerations besides the usual financial factors. The key distinguishing feature of these funds compared to other funds is their focus on companies with environment-friendly practices, ethical business operations, and employee welfare record. In other words, they are a blend of sustainable investing and socially responsible investing.
Normally, a mutual fund looks at various factors such as potential earnings, management quality, cash flows, the industry of operation, competition, etc., of a company before investing. However, ESG funds prioritize those companies that demonstrate strong performance in environmental, social, and corporate governance aspects before delving into financial metrics. Being regulated by the Securities and Exchange Board of India (SEBI), these funds provide an opportunity for investors to align their investment decisions with their conscience.
Rising Popularity of ESG Funds
The growing popularity of ESG funds can be attributed to an evolving mindset among investors. Today’s investors are keen on examining the long-term impact of their investment on the planet and society at large. As a result, ESG considerations are becoming integral to their investment strategy.
An international organization, the United Nations Principles for Responsible Investment (UN-PRI), is promoting this trend by encouraging the integration of environmental, social, and corporate governance factors into investment decision-making processes.
The Impact of ESG Funds
The ascendency of ESG funds in India is set to reshape the corporate landscape, making adherence to ethical practices, environment-friendly measures, and social responsibility non-negotiable for companies. Those failing to adopt sustainable business models may find it challenging to raise both equity and debt capital.
Globally, investors like pension funds and sovereign wealth funds are shunning companies involved in activities deemed harmful, like pollution and tobacco production. For instance, despite an annual profit of USD 35 billion, the global tobacco industry faces divestment due to its contribution to nearly 6 million deaths per year. This scenario indicates the growing sensitivity of investors towards businesses whose operations have a detrimental impact on society.
The Benefits of Being ESG Compliant
One major benefit for ESG compliant companies is enhanced preparedness for potential regulatory changes. As environmental and social regulations tighten, these companies will be better positioned to comply, thereby gaining a competitive advantage. Furthermore, a reputation for being ESG compliant can significantly boost a company’s credibility, which in turn can attract more investors due to their sustainability. Overall, ESG compliance can potentially provide such companies with an edge to gain significant market share over their non-compliant competitors.
