Things to Look at Before Investing in ESG Funds

Today, people are becoming more aware of the need to follow sustainable practices for a better environment. And this is clearly being echoed in the manner modern investors invest in their funds. Over the past few months, ESG mutual funds have been creating a buzz in the market and that calls for some introspection.

ESG stands for environmental, social, and governance. It offers investors the opportunity to invest in stocks and funds of companies that follow environment-friendly practices. ESG funds involve investing in the assets of a company that have scored well on the ESG scale.

Perhaps you’ve already heard of it and are now thinking of investing sustainably. Should you be investing in ESG fund?Here’s all you need to consider before investing.

Understand the criteria for ESG investment

The ESG companies are assessed on their sustainability where you can invest in different types of ESG funds. A company is deemed to be ESG compliant if it fulfills all the criteria of environmental, social, and governance principles.

• Environmental- Environmental aspects include how a business follows sustainable practices, how it controls greenhouse gas and carbon emissions, efficient use of natural resources, recycling practices, and more.

• Social- It focuses on the well-being of the business's employees. For a socially responsible company, employee welfare is its top priority. Here, factors like gender equality, work-life balance, equal pay, etc., are evaluated.

• Governance- Here, the companies are evaluated based on their corporate governance. It focuses on compliance with regulatory requirements, financial disclosure, strict internal policies against any malpractices, and more.

Consider the ESG score

The adherence to ESG standards and the best performing ESG funds can be evaluated based on an ESG score allotted to the companies by various research organisations. For instance-

• MSCI ESG scale assesses how well a company manages its ESG risk as compared to its peers.
• Morningstar’s ESG score calculates the ESG risk factor of the company or the mutual fund, on a scale of 1 to 50.

As an investor, you need not worry about how these scores are calculated. However, when determining which list of ESG fundsyou want to invest in, you must take these scores into account and compare which fund is better for you and why.

Additional Read – The future of ESG Mutual Funds in India

Are ESG funds profitable?

For investors who are keen on the idea of giving back to society, ESG is an excellent mutual fund investment option. ESG funds are like any other investment option, where the returns are as high as the focus on sustainability. With the increasing popularity among investors, seven out of nine ESG funds had outdone the market performance level of the past five years.

Moreover, studies have revealed that businesses with a higher ESG score have a comparatively lower cost of capital. Which can result in better profits and higher returns for investors.

Additional Read –5 Reasons Why Your Portfolio Needs Multi-Cap Funds

In a nutshell

While ESG funds are a profitable and sustainable investment alternative, they are still a newer mutual fund option that needs careful introspection before investing. Of course, as years go by and more data becomes available, investing in ESG funds will offer great advantages.

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