ESG funds yet to catch investors fancy

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In recent years, ESG (Environmental, social and governance) funds have steadily caught the eye of investors. However, its way to the regular investor’s portfolio still remains a long way. At present, there are only 10 mutual fund schemes in India that have ESG under thier fold.

Though the S&P BSE 100 Index has delivered 13.34% over a 1-year period, retail investors are yet to completely warm up to it. A Morningstar report noted that AUM under ESG funds declined by Rs 2,020 crores in FY 22-23.

Part of this is attributable to ambiguous understanding of the ESG funds, and what they mean. Simply put, ESG funds are thematic mutual funds that invest in socially responsible companies that promote sustainable growth. Their impact is measured on three parameters, namely environmental, social and governance 

Explains Shriram Sharma, Investment Advisor, Elevo by Tarrakki, “ ESG practices include strategies that select companies that support their stated commitment to one or more ESG factors —for example, companies with policies aimed toward reducing their environmental impact or focusing on transparency and governance principles”.

“ESG practices can also entail screening out companies in certain sectors that, in the view of the fund manager, have shown poor performance with reference to the management of ESG risks and opportunities. Ethical practices towards the environment may include reduction in carbon footprint, energy efficiency, conservation, and biodiversity protection. As part of the social criteria, human rights, gender diversity, equal opportunities, and safety are considered. Governance factors include business ethics, whistle-blower schemes, board diversity, executive compensation, and tax management”, he continues.

Under current regulations, mutual fund houses are permitted to launch only one scheme that has ESG as its underlying theme under thematic equity mutual funds. But SEBI is now widening its ESG ambit, allowing fund houses to launch ESG fund with any one of the following strategies