ESG (Environmental, Societal, and Governance) mutual funds are funds with direct investments in shares and bonds of ESG companies. ESG companies are evaluated based on environmental, social, and governance parameters, such as sustainability, pollution-friendly, waste management, natural resources, clean energy use, protection of human capital, human resource rights, promising labor practices, and more. The ESG tag is given to companies after stringent evaluation and reflects the company’s culture, the risk involved, management, ethos, and more. Investing in ESG mutual funds is beneficial to diversify your portfolio. Moreover, if you want to invest in environmentally-conscious and sustainable companies, consider opting for ESG mutual funds.
Here are some reasons to invest in ESG mutual funds:
Companies that imbibe ESG values into their functioning reduce risk and volatility by being transparent about their functioning, operations, and financials. The reputation of ESG companies is comparatively stable than other companies, reducing the risk of stock price volatility. Low risk translates to higher cash flows, profitability, and a lower frequency of shocks. Investing in ESG funds through SIP (Systematic Investment Plan) can lower your investment risk.
As the world becomes more environmentally conscious, investment in ESG companies will become more valuable, eventually resulting in long-term profitability. Further, the goodwill and positive brand image of the ESG companies will likely increase their premiums in the market, ultimately increasing their long-term profitability.
Investing in ESG mutual funds helps to diversify your overall mutual fund portfolio. ESG companies have sustainability characteristics and planned growth, delivering consistent growth for investors. Generally, ESG companies have low debt levels, low volatility, and lower drawdown risk.
ESG mutual funds seek investment in companies that generate sustainable growth. As an investor, if you are environmentally and socially conscious, investing in ESG mutual funds will help you take a step forward in this direction.
ESG companies are more inclined towards shareholder interest. All actions and reactions of the company are directed towards improving society and the benefit of the shareholders. Investing in ESG mutual funds assures you of principal and capital appreciation in the long run.
Overall, ESG mutual funds have gained momentum over the last couple of years. As people become more environmentally and socially aware, companies will be forced to improve their governance and ethical practices. Therefore, investing in ESG mutual funds is also beneficial from a futuristic perspective.
Most ESG funds use parameters, such as carbon emissions, greenhouse gases, and employment generation, to select companies for investment. Companies involved in tobacco manufacturing, coal mining, oil and gas, fossil-fuel-based power generation, etc., are not a part of ESG mutual funds. Companies focused on renewable energy, technology, healthcare, FMCG, etc., are a prime feature in ESG mutual funds. However, despite ESG mutual funds being profitable and future-worthy, they have a high expense ratio. Hence, as an investor, it is advisable to check the expense ratio of these funds before investing.
You can use the Tata Capital Moneyfy app to find an ESG fund with an expense ratio that fits your budget.