All About ESG Mutual Funds

Markets regulator the Securities and Exchange Board of India (SEBI) has introduced a plethora of measures to give a push to Environmental, Social and Governance (ESG) factor-based investing in the country via mutual funds.

Now, it will be possible for asset management companies (AMC) or fund houses to introduce more than one scheme, the investment mandate of which is driven by ESG factors.

ESG schemes are thematic mutual funds that invest in stocks with a focus on a theme.

Generally, a company or a mutual fund is assessed depending on its historical performance, business model, annual reports, etc. However, with investors becoming aware of additional factors such as environmental, social, and governance issues, ESG funds invest in stocks and bonds of socially responsible companies.

Environmental factors comprise a company’s stance towards greenhouse gas emissions, business model sustainability, and utilisation of renewable resources, to list a few.

At the same time, social factors could comprise a company’s efforts towards diversity and inclusion, promoting work-life balance and well-being among employees, etc.

Finally, the governance aspect takes into account the company’s stance towards risk management, ethical business practices, accounting integrity and transparency, etc.

As per the SEBI mandate, ESG funds are required to invest about 80% of their assets in securities or bonds that comply with the ESG theme and the other 20% of assets cannot be invested in stark contrast to the ESG philosophy.

For example, a fund house refrains from investing in companies that promote products and services such as alcohol, tobacco, gambling and so on.

At the same time, if a fund’s theme is to avoid investing in companies that lead to pollution in the environment, it should avoid companies engaged in petrochemicals, pesticides, etc.

Currently, there are 10 ESG mutual fund schemes that manage about Rs 10,216 crore.