How to Choose the Right ESG Fund
The Rising Attraction of ESG Funds in Investment Portfolios
ESG funds in India have rapidly gained traction among investors due to sustainable investing principles. These funds offer an avenue for investing “sustainably,” aligning investments with considerations for their environmental, social, and economic impact. The increasing emphasis on corporate social responsibility and social sustainability has heightened investor awareness regarding ethical participation in the market.
ESG funds allocate assets from companies or bonds evaluated on Environmental, Social, and Governance (ESG) factors. There has been a recent surge in the expansion of ESG funds within India and global economies. The pandemic spotlighted the interdependence among environmental, social, and economic factors for business growth, leading approximately 88% of public corporations to implement ESG initiatives. Here are a few ESG Funds in India that are highly recommended.
E.S.G Funds stock recommendations in India:
| FUND NAME | TOP 5 HOLDINGS | CURRENT ESG SCORE |
|---|---|---|
| Quantum India ESG Equity | TCS Ltd., Infosys Ltd., HDFC Ltd., Tata Motors Ltd., Tata Communications Ltd. | 26.31 |
| Kotak ESG Opportunities Fund | HDFC Ltd., TCS Ltd., Infosys Ltd., ICICI Bank Ltd., Bharti Airtel Ltd. | 27.06 |
| Mirae Asset ESG Sector Leaders ETF | Infosys Ltd., HDFC Bank Ltd., HDFC Ltd., Reliance Industries Ltd., TCS Ltd. | 25.02 |
| Axis ESG Equity Fund | Avenue Supermarts Ltd., TCS Ltd, HDFC Bank Ltd., Bajaj Finance Ltd., Kotak Mahindra Bank Ltd. | 23.05 |
| Aditya Birla Sun Life ESG Fund | Infosys Ltd., Axis Bank Ltd., HDFC Bank Ltd., Bajaj Finance Ltd., State Bank of India | 23.3 |
|
ICICI Prudential ESG Fund |
Infosys Ltd., TCS Ltd., HDFC Bank Ltd., Divi’s Laboratories Ltd., Marico Ltd. | 24.75 |
| Quant ESG Equity Fund | Fortis Healthcare Ltd., Infosys Ltd., General Insurance Corporation of India, Oracle Financial Services Software Ltd., PTC India Ltd. | 31.29 |
Source: ESG Funds: Meaning, How Do They Work & Invest in India (etmoney.com)
Factors Propelling the Popularity of ESG
Millennials actively advocate for environmental and climate issues, gravitating towards companies that invest in ethical causes. Historical performance indicates that ESG themes have outperformed non-ESG portfolios.
Vital Considerations Before Investing in ESG Funds
The ESG (Environmental, Social, and Governance) theme is gaining prominence in India’s investment landscape. However, the prudent selection of a scheme for investment demands careful attention. Here are critical parameters to guide your choice of the best ESG mutual fund:
Historical Performance and Sustainability
Past performance doesn’t guarantee future returns. Yet, evaluating an ESG fund’s historical performance against benchmarks and peers offers crucial insights. Consistently surpassing benchmarks and peers indicates promising investment options. Sustainability holds equal weight for ESG funds, directing investments towards companies aligned with ESG norms. These funds enable investments in sustainable businesses that actively contribute to societal betterment.
Investment Objective
ESG investing embodies principles of sustainability, ethics, and social responsibility. Such funds prioritize companies excelling in environmental, social responsibility, and corporate governance criteria. As investors reconsider their strategies, emphasizing the impact on the planet, ESG funds craft portfolios that emphasize ethical and social impact while employing risk mitigation techniques to benefit investors.
Investment Horizon
ESG mutual funds, classified as equity schemes, necessitate a long-term investment horizon for significant returns. Short-term volatility characterizes these schemes. Therefore, considering an ESG fund only with a long-term investment horizon and alignment with the theme is prudent.
Suitability
Tailored for aggressive investors seeking sustainable, ethical, and eco-friendly investments, ESG mutual funds diversify portfolios. However, commitment to a long-term investment horizon remains pivotal. Hence, assessing the theme’s suitability concerning investment portfolios, goals, and horizons is imperative.
Asset Allocation
Diversification is fundamental in mitigating market volatility. ESG funds in India, although centered around a theme, may constrain stock choices. Primarily focusing on large-cap companies compliant with ESG norms, fund managers might also opt for mid-cap and small-cap stocks. Seek ESG funds exhibiting well-diversified asset allocations.
Market Dynamics Consideration
While the theme of ESG funds in India garners importance, its growth might not be perennial due to susceptibility to market pressures. Investors who are well-versed in the theme and willing to navigate volatility can consider investing in ESG mutual funds.
Key Considerations in Selection
Investors should assess ESG ratings or scores while selecting stocks. External agencies typically calculate scores based on environmental impact, employee engagement, and workplace practices, ranging from 0 to 100.
Advantages of ESG Fund Investment
- Potential aligned with environmental, social, and governance themes
- Significantly favorable long-term gains
- Focus on risk mitigation and high-quality stocks, contributing to positive societal impacts.
Choosing the Best ESG funds
Understanding the differences between passive and active funds is essential while making a decision for good stock recommendations. Actively managed ESG funds tend to be more costly than passively managed ones. Considering investment goals, tax situations, and experience is crucial when deciding between active and passive funds.
This growing trend towards ESG investing reflects a broader shift in investor preferences, emphasizing sustainable and socially responsible practices in investment decisions.
