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What Are ESG Funds? : All You Need To Know About It

Personal Finance

Many people invest in mutual funds to expand their wealth. There are many types of mutual funds that you can invest in. When you select a mutual fund, many factors need to be considered. These include historical returns, profits, industry, transparency, etc. But recently, a new mutual fund has become popular among investors. It is known as the sustainable approach. As a result, ESG mutual funds came into being.

Though a recent entry into the world of mutual funds, ESG funds have become popular. The number of fund houses starting ESG mutual funds is growing every year. Experts predict ESG funds to become among the most popular mutual fund types in the future. But what are ESG mutual funds? Should you invest in them? Read on to learn more.  

What are ESG Funds?

ESG funds are a type of mutual fund where the fund managers select shares based on environment, social, and governance-related parameters. It is a form of sustainable investing. Herein, the fund managers invest in entities that have a holistic and environment-friendly way of working.

  • Environment: The fund managers consider the factors that affect nature. These companies focus on having a lower carbon footprint, using solar power, and saving water. They want to work for a greener future.
  • Social: This aspect focuses on the efforts to ensure the well-being of people. Such companies invest in social causes and ensure gender equality, worker welfare, and other such issues.
  • Governance: Here, the focus of the fund managers is on the work style of a company. The factors taken into account include ethical conduct, strong policies, transparent working, and several others.

ESG Funds and Investors

Since ESG is now a type of mutual fund, it has attracted the attention of investors. Now many people value companies’ nature-friendly conduct of companies as these steps have a direct impact on their results. Hence, you must also evaluate these aspects when you decide to invest your money.

ESG mutual funds are also known as theme-based mutual funds. They invest in socially responsible companies. The investment process focuses on entities that aim to ensure nature-friendly workings. These entities boast of business models that can meet the guidelines of sustainable working and help investors create long-term wealth. These funds can invest across a range of market caps and also with overseas companies that meet the given ESG rules.

What is an ESG Score?

ESG score is a vital metric that can help you decide if a company is an ESG fit. If it is, then what is its compliance level? Many entities that do market research in the equity and mutual fund industry decide the ESG score based on their practices. Such scores are not fixed and change based on the ESG steps taken by a company.

While an ESG score is not mandatory, it is crucial for a company that claims to care for the environment. Every research team gives an ESG score based on its workings, thus, scores can vary.

When it comes to ESG funds, the steps taken by the research team to decide on a score are not your concern. But you must use an ESG score to look for ESG mutual funds that have a high rating and are more likely to be ESG compliant.

Challenges to ESG Investing

If you want to invest in ESG funds, you must know about many aspects that can affect the returns you can get. Read on for details on issues you must focus on when it comes to ESG mutual funds:

  • Lack of Data: ESG funds are relatively new in the market. As a result, data on these funds are not easily available. You must look at the reports shared by such entities and their ESG performance. While it will cost you time and money, make sure to perform due diligence before deciding to invest.
  • Lack of Clarity: There is no method to know if an entity has a high ESG score. There are no norms to decide if a mutual fund or a share meets the ESG guidelines. Hence, you may never be sure about a share being an ESG fit.
  • Fudging: There is always a chance that a company can tamper with the results to show a high ESG score. As a result, you will need an experienced fund manager to research and find out the facts.
  • No Track Record: Since ESG is a new concept, the track record of many ESG mutual funds may not be available in the market. Hence, you will need to base your investment decisions on the data that you can access.

Summing Up

If you are someone who wants to invest in ESG funds, ensure that you gather all data related to such funds. Conduct your research and then decide to invest in ESG mutual funds. If you need any other data or guidelines on ESG funds, visit Piramal Finance. They have many blogs and articles on a range of topics that will improve your financial skills. You will then be able to make decisions based on data and not on hunches.