ESG description
ESG stands for Environmental, Social and Governance. ESG schemes are blend of equity and/or bond portfolios, which encompasses Environmental, Social and Governance factors into an integrated investment process. An ESG fund/scheme should include only those securities (equity or debt) taking care of global warming, lower carbon footprints, pollution control, industry relations, better management practices, etc. factors. For example, a smart hill city coming up in Pune district ran into environment issues for not obtaining environment clearances - leading to inordinate delay, funds crises, and getting into IBC process. It also cover sovereign bonds of the Government which is having poor record on pollution control, lacking green initiatives, and labor management issues. ESG compliant investments are also termed as Impact Investment which benefit society as a whole.
ESG Impact
Researchers have found that application of ESG criteria in security selection process leads to well-informed investment decisions, and funds having sustainability criteria fare well than those not complying with ESG parameters. Better performance could be attributed to risk management policies those exercise control over contentious issues, lower carbon foot print to prevent societal issues or regulatory risk. ESG funds are, gradually, gaining popularity among investors who strongly believe in renewable energy, reducing toxic gas emissions, gender pay parity, diversity data transparency, human rights policies, board diversity, corporate responsibility and results disclosure. ESG community has been fostering awareness and change management culture in bringing about the change. More such collaborations among stakeholders viz. investors, corporate, institutions, government suppliers, vendors, employees would provide much needed impetus to acceptance of sustainable business practices while taking care of investment returns.
ESG penetration in India
The moot question arises is Indian market ready for ESG investments or Impact Investments? The answer would be Indian markets are gaining traction for the ESG funds gradually. The substantial part of Foreign Funds inflow carry ESG mandate, which finds entry into ESG compliant securities or funds. These type of inflows may not find it appropriate to invest into tobacco, metal companies stock or PSU stocks those are not ESG compliant. While Indian investors might take some time to adapt to investing in ESG compliant stocks or funds, yet seven AMCs have launched ESG schemes in the last 20 months, thereby garnering AUM of around Rs 6,000 crore. SBI Magnum Equity fund became first ESG MF scheme when it changed nomenclature to SBI Magnum Equity ESG Fund in May 2018. The total MF Industry AUM as on 31st December 2020 has reached a level of Rs 31.02 lakh crore, which means ESG funds are currently at nascent stage in India. Perhaps increasing awareness coupled with returns generated over a period of time might find Indian investors moving towards ESG compliant investments.
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