In a world of increasing awareness of our planet and the impact that companies have on it, more and more investors are aligning their wallets with their values. Focusing more on the future than just immediate profit and loss, they invest in companies that meet certain criteria in Environmental Social Governance or ESG.
But with that arises the questions of what ESG is, how ESG investing works, the pros and cons of investing in ESG-focused funds, and how to choose the right ESG fund.
In this article, let us explore these questions and discuss their impact when buying the best mutual funds for sip.
What is ESG?
ESG is a principle that measures the environmental impact (E), social responsibility (S), and governance standards (G) of a company. Under environmental impact, it measures a company’s efforts in environmentally sustainable practices and eco-friendly initiatives.
Under social responsibility initiatives like fair labor practices, diversity, inclusion, and community engagement are measured. And finally, under governance, transparent leadership, ethical business practices, and responsible corporate governance are measured.
How does ESG investing work?
ESG investing in India is a recent phenomenon that involves considering the above factors alongside traditional financial metrics. Investors consider ESG scores allotted by research organisations to assess the level of ESG compliance before investing. Besides this, with the SEBI directive requiring the top 150 listed companies to disclose their ESG-related activities, investors can enjoy enhanced transparency and encourage companies to improve their ESG practices.
But rather than just being a cost or additional things to consider, ESG investing presents significant business opportunities for companies in India whereby adopting sustainable practices and focusing on ESG factors, businesses can enhance their operational efficiency, reduce risks, attract capital from responsible investors, gaining a competitive advantage in the market.
What are the pros and cons of investing in ESG-focused funds?
Several pros and cons need to be considered when investing in ESG-focused funds.
| Pros | Cons |
| Sustainable investing- These funds invest in companies that benefit the planet and its people. | Decreasing interest: There is a depleting interest in sustainability among certain sub-groups of investors, thus reducing the target for ESG funds. |
| Risk reduction: ESG funds can reduce risks by investing in good, sustainably growing companies. For instance, a company with good business practices is less likely to get into legal trouble that could lower its stock price. | Money outflow: ESG-focused funds are seeing a consistent outflow of money, lessening the assets under management (AUM). |
| Long-term performance: ESG funds usually do better over time than traditional funds. | High fees: Many carry high charges, which can eat into returns over time. |
| Social and environmental benefits: By investing in companies that meet ESG standards, you’re indirectly helping the environment and social causes. | Limited choices: It can be challenging, if not impossible, to find wholly “green” companies to invest in, as most companies have some level of exposure to environmental or social issues. |
How to choose the best SIP mutual funds focused on ESG?
- Assess ESG scores as well as compliance with certain factors.
- Assess the fund’s investment strategy and determine whether it matches your objectives.
- Consider the total expense of the fund.
- Assess the fund’s historical performance and analyse trends or growth or decline.
By assessing these factors, it is possible to determine the best mutual funds for sip that align with your ESG goals.
Conclusion
Secure the future for yourself and your future generations with sustainable investing. While it may feel like an unnecessary step in your investment goals, investing in what is right can make a difference. So buy SIP plan online, focusing on the future today, using investment apps like Bajaj Finserv, and make the future a better place for all.