Things You Need to Know Before Investing in ESG Funds
Sustainability is a trending term today, with more investors looking at ESG (environmental, social and governance) factors when making their investment decisions. It’s a good thing because ESG factors are important for long-term investment success, but there are a few things you need to know before buying into these new funds.
What are ESG funds
An ESG mutual fund pays close attention to a company’s social, environmental, and governance (ESG) performance and financial performance. Before investing in a company, an ESG fund will generally find out about the company’s products and whether or not they follow the corporate social responsibility (CSR) principles. Businesses that produce goods which are considered harmful to the environment or society’s health, such as alcohol or tobacco, are not allowed for ESG investments.
ESG-compliant businesses do well when it comes to financial performance as well as environmental, social and governance factors. The organisation’s greenhouse gas emissions, the workability of its business model, its use of renewable resources, and similar factors are considered environmental factors. Similarly, the social criteria include how they treat their employees, how they view work-life balance, how they ensure that everyone has the same opportunities regardless of gender or religion, etc. Here, governance means the leadership of the company and their sensitivity to shareholders.
Overall, ESG-compliant businesses perform better financially and in terms of key sustainability indicators. This makes them a more attractive investment for both individuals and institutional investors alike.
What you Need to Consider Before Investing in ESG Funds
Before you invest in an ESG fund, there are a few things you need to know. Here are the top 3 things you need to know before investing in ESG-related funds:
- Diverse PortfolioExpanding on your investment portfolio is one of the best ways to protect yourself from market volatility. However, this rule can be difficult to follow when it comes to ESG (environmental, social, and governance) funds. You might be inclined to only invest in large-cap stocks because most ESG companies are large-cap stocks. However, this would limit your options and put you at more risk than a diversified portfolio would.
- Sustainability One of the most important topics of discussion in recent years has been climate change and its effect on both businesses and the planet. Today, companies are under pressure to adopt sustainable business practices, and investors must be careful about which organisations they choose to support. As an investor, you can do your efforts in shaping the future by investing in ethical businesses that employ sustainable practices. An ESG mutual fund is one way you can do this, allowing you to financial goals without ignoring your moral duties.
- Good ReturnsMany people believe that a charity is the same as an ESG fund. But, in reality, they are not. Just like any other mutual fund, an ESG fund focuses on both sustainability and returns. The Nifty 100 ESG Index was created to produce average returns of 10.9%, and that number is still increasing.
ESG Mutual Fund Options
Investing in companies that focus on environmental, social, and governance issues (ESG) has become popular in the past few years as more and more people are interested in making a difference with their money. Most well-known fund houses offer ESG investment opportunities, including SBI Magnum Equity, ICICI Prudential, Aditya Birla Sun Life, Kotak Mutual Fund, Quantum India, and Axis Mutual Fund. However, because this is a specialized field, the fund companies have increased the expense ratio of their ESG funds.
ESG funds are designed to assess the social and environmental impact of companies, using indicators like carbon emissions, greenhouse gas emissions, and employment generation. This means that ESG portfolios typically exclude companies with high carbon footprints, such as tobacco producers, coal miners, oil and gas companies, and fossil fuel power plants. Instead, these portfolios are heavy on businesses in sectors like FMCG, healthcare, renewable energy, and technology.
The Way Forward: Risks & Returns
There are both risks and opportunities which come with investing in ESG funds. On one hand, there is scope for positive environmental and social outcomes linked with these types of investments. However, there is also the chance for lower returns compared to traditional investments, as well as the possibility of negative publicity if companies in the portfolio are involved in scandals or controversies. Overall, investors need to carefully consider both the risks and benefits before deciding if they should invest in ESG funds.
To Sum Up
When it comes to investing, there are a lot of different options to choose from. ESG mutual funds are a type of investment fund that focuses on environmental, social, and governance issues.
There are a few things to keep in mind when considering ESG mutual funds.
- First, it’s important to make sure that the fund is in line with your values.
- Second, you should do your research about the fund to make sure that it has a good track record.
- And third, you should be prepared to commit to the fund for the long term, as these types of investments tend to be more volatile in a short time.
Overall, ESG mutual funds are great for investors who want to make a positive effect on the world and create solid returns.
ESG mutual funds can be a good option for investors who are interested in promoting sustainable and responsible investing. However, it is important to remember that these funds are still subject to market risk. Before investing in any type of mutual fund, make sure to do your research and speak with a financial advisor to check if it is the right investment for you. Consult the experts at Piramal Finance to make smart investment decisions.