While most individuals invest to ensure that they earn and benefit from the same in the long run, there are some investors who care about the environment and wish to invest in a sustainable future. For such investors, the introduction of ESG funds have paved the way for investing in companies that care about the environment consciously. ESG is abbreviation of environmental, social and governance. To be a company that is compliant to be and considered as ESG friendly, organizations are tested based on the three parameters – environmental, social and governance. The ESG fund manager picks stocks of those companies that are constantly struggling to ensure that they are making an impact on the environmental, social and governance front. ESG funds do a thorough research about companies that are considered to be ESG complaint and only consider investing in stocks to those companies that are striving to protect the ecosystem whilst growing and becoming bigger organizations.
All three pillars of ESG are equally important and while the organizations are striving towards ensuring that they protect the environment by setting up proper waste management techniques for taking care of the residual emitted from factories, they must equally ensure that they take care of the employees and serve in their best interest. It is believed that a company’s internal stakeholders which is their employees are equally vital as much as their external stakeholders. The reputation of a company is highly depending on how it treats in employees and ESG funds ensure that they choose companies that host a work friendly environment. The third pillar of ESG, governance is considered as compliant only when it is ethical in disclosing its financial statements and income flows.
What are some of the factors one should consider before investing in ESG funds?
Investors are expected to do some background check before investing in a particular ESG fund. Apart from looking at its past performance, investors are also expected to ensure that other factors of the scheme like its expense ratio, fund management are all viable enough. Investors can also compare the performance of the scheme with other ESG funds to understand whether it has been consistent in generating stable returns.
The investment objective of the scheme must align with that of the investor. ESG funds’ primary focus is to invest in stocks of companies that are ESG compliant and to earn capital appreciation over the long term. It is essential for the investment objective and the risk profile of the ESG fund to comply with that of the investor. ESG funds focus on attributes that are other than financial and this must also be taken into consideration before investing in these sustainable funds. While companies that sell liquor or tobacco may generate high revenue, ESG funds generally avoid investing in such companies, thus living up to the fact that their primary focus is building a sustainable future.
Consider starting a monthly SIP in ESG funds
ESG funds are equity schemes that aim at generating capital appreciation over the long term by investing in ESG complaint companies. If you wish to inculcate the discipline of saving and investing for the long run, you can consider starting a monthly SIP in a ESG scheme of your choice. Systematic Investment Plan Systematic Investment Plan is an investment tool that allows investors to invest fixed small amounts at regular intervals. SIPs do not come with a lock in period which means you are free to continue investing till your investment objective is achieved. Long term investing in equity funds like ESG schemes via SIP is known to allow investors to benefit from investment techniques like rupee cost averaging and power of compounding.
ESG funds do not guarantee capital appreciation. Investors are expected to seek professional consultation before investing.