ESG Funds: Know What is ESG Score, Features, Best ESG Funds & How to Invest

ESG (Environmental, Social and Governance) Funds fall under the category of Thematic Funds wherein the portfolio constitutes stocks of companies with a sustainable business model. These are the companies with minimum ESG score; which do not harm the environment in any way and have no evidence of any social risk.

What is ESG Score?

ESG score is a parameter to judge whether a company is environmentally and socially sustainable or not. This score ranges from 0 to 100 weighting the performance average on the defining factors- Environment, Society and Governance. When the ESG score is high, it means that the company has been performing greatly and taking suitable measures for sustainability on these factors. However, low ESG score denotes that the company is not taking proper initiatives on these factors and thereby, is bound to undergo losses due to regulatory punishments, natural accidents or environmental crisis.

Best ESG Mutual Funds in India

Given below are the available fund options for investors interested in the ESG Investing strategy:

Fund Name

SBI Magnum Equity ESG Fund

Quantum India ESG Equity Fund

Axis ESG Equity Fund

Features of ESG Mutual Funds

• Environmental Criteria:

This criteria in the ESG investing makes sure that the company is practising best measures to keep the environment unaffected by its business activities. For instance, the factories and workplace surrounding, energy usage, pollution, conservative use of natural resources are some of the basic factors which must be taken care of to make sure the work process does not hinder the environmental well-being.

The companies which consider such practices are not just strong with working ethics but also denote good potential.

• Social Criteria

This criterion measures to what extent the company is socially conscious about the well-being of their employees and people. How a company treats its employees, their safety, fair code of conduct irrespective of the gender, etc. are some of the terms which are valued under the Social criteria of ESG Funds. Such companies focus on improving the work-life of the employees and maintain work balance.

The companies which follow this strategy strongly are appreciated by the employees as well as the stakeholders. This eventually enhances the goodwill of the company in the market.

• Governance Criteria

Under this parameter, the company’s transparency towards matters like financial disclosure and standards of governance are valued. The companies which take such matters into account are not affected by the regulatory reforms.

As far as investor’s concern is concerned, investments in companies with strong governance remain safe to a greater extent.

Pros and Cons of ESG Investing Strategy

Pros:

• Helps the investors avoid any practices of a company which are indicative of any risk factor
• Helps the investors in tracking the overall performance of a company

Cons:

• Centralising this strategy for investments may oversee other market-related factors
• These funds are not suitable for investors with a low-risk appetite

Who should invest?

• Investors with a high-risk appetite
• Investors who are willing to invest for a long term (at least 5 to 7 years)

How to Invest in ESG Mutual Funds

There are different methods through which one can invest in ESG Funds:

• Offline mode – Visiting the nearest branch office of the fund house and investing in the desired scheme. You must carry all the required documents such as Identity Proof, Address Proof, Cancelled Cheque, Passport size photos, PAN Card and KYC Documents handy. You can also invest offline through a broker. However, this would then be a regular fund and not a direct fund. Think of it like a  charge brokerage which gets deducted from the total investment amount

• Online Portal – If you want a hassle-free mode of investing with no commissions and brokerage, you can choose websites like Paisabazaar.com which allow the investors to compare more than 1,700 funds at one platform instead of visiting the website of each AMC and then searching for numerous funds. You can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment