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Building a Sustainable Portfolio: Investing in ESG Funds for Young Investors

We all want to leave the world a bit better than we found it!

This is one of the main reasons why environmental and social sustainability is something that younger generations prioritize in their practices.

Whether it is ordering food from ‘green’ restaurants, or buying clothes that are manufactured using organic materials – sustainable living is slowly but surely becoming a fabric of our being.

Luckily for the planet – this is a step in the right direction! And luckily for us – we get to now talk to you about the meaning of ESG funds!

What are ESG Funds?

Oops! We got ahead of ourselves! Let’s first decode the full form of ESG funds – ESG stands for Environmental, Social and Governance. 

ESG factors have taken center stage because young investors today have recognized the importance of aligning their financial goals with ethical and sustainable principles (Kudos!). As sustainability has become increasingly important for young investors, so has ESG investing! But, where are they investing? In ESG funds in India!

ESG funds have taken the world by storm, as a compelling investment option, especially for millennial and Gen Z investors, who are not only seeking financial returns but also aiming to make a positive impact on the world around them (More kudos!)

So, ESG mutual funds, also known as sustainable or socially responsible mutual funds, are investment options in India that integrate environmental, social, and governance factors into their investment decisions. These factors go beyond standard financial metrics and instead also consider the broader impact of companies’ actions on the environment, society, and corporate governance. ESG funds seek to allocate your capital toward companies that exhibit strong ethical practices, promote and actively pursue sustainability, and demonstrate responsible corporate behavior (the holy trinity of all things good!)

Components of ESG

Features of ESG Funds

Now that you have a fair understanding of what ESG funds are and what its key components are, we can move onto understanding the key features of ESG funds that make it a standout choice among young investors – 

1. ESG Integration – No doy! ESG fund providers assess companies based on their performance in areas such as carbon emissions, resource efficiency, labor practices, diversity and inclusion, board composition, executive compensation, and transparency. These are important questions to ask of brands in any case, but these kinds of mutual funds ensure that ESG factors are all accounted for to make it a viable investment option for young investors.

2. Screening – Only the companies that check off certain factors in the ‘green checklist’ qualify to offer investments in ESG funds. ESG funds employ a screening process to identify companies that meet specific ESG criteria. These criteria can vary between funds and can be negative (i.e., excluding companies with poor ESG performance) or positive (i.e., actively selecting companies with strong ESG performance). ESG mutual funds often rely on independent ESG rating agencies or research providers to assess companies’ ESG performance. These ratings can enable you to make more informed decisions about your investment journey!

3. Focus – What cause are you passionate about? What’s close to your heart? Some ESG mutual funds in India might have specific thematic focuses, such as clean energy, gender equality, or water conservation – off the top of our head! This allows you to target your investments towards causes you are particularly zealous about.

4. The Metrics – In addition to traditional financial metrics (which of course these funds are measured against), ESG funds also often use specialized performance metrics to evaluate companies’ ESG performance. These can potentially include carbon intensity, gender diversity ratios, water usage efficiency, and more. ESG funds might find a benchmark for their performance against specific ESG indices, which are designed to reflect the performance of companies with strong ESG practices.

5. Risk Management – Typically, you would consider the risk associated with mutual fund investments, based on its financial performance (current, or projected). But ESG mutual funds require risk assessments based on various non-financial risks. This could include reputational risks across a range of reasons, spanning from poor environmental practices, to unethical labor practices. By addressing these risks, ESG funds aim to help young investors build more resilient portfolios.

These features are designed to align investments with your own sustainable and ethical considerations – and you will find yourself spoiled for choices. Leverage these features to find mutual funds that are helping you create wealth, but through sustainable and ethical initiatives.

Benefits of ESG Funds

Features are well and fine – but here’s the scoop! – ESG funds can be hugely beneficial to your financial portfolio! Here are three of the key benefits you can expect when investing in ESG funds – 

1. Alignment of Values – Put your money where your heart is! Young investors often have a strong desire to make a positive impact on the world – as you should! ESG mutual funds allow you to invest in companies that prioritize sustainability and social responsibility judiciously. This alignment with personal values will provide you with a sense of purpose and meaning in your investment journey – which will motivate you to stay on the path to financial development!

2. Long-Term Performance Potential – Research has indicated that companies with strong ESG practices tend to demonstrate resilience and potentially outperform their peers in the long run. Young investors can benefit from the potential for more stable and robust financial performance over time as ESG factors contribute to risk mitigation and innovation.

3. Influence on Corporate Behaviour – There was a time when companies did not care about environment and sustainability, because consumers didn’t pay much attention to these things either. This is far from today’s reality – when young investors like you are at the helm of the economy. Corporate Social Responsibility (CSR) is not just a buzzword for investors today. By including ESG funds in their portfolios, investors are encouraging companies to step up and go green!

It is important to keep in mind that as ESG investing continues to gain prominence, these benefits, cumulatively with the key features of ESG funds, contribute to a more responsible and sustainable investment landscape in India. The world will continue to grapple with complex challenges with respect to sustainability, but ESG funds provide a meaningful way for young investors to shape a more sustainable and inclusive future.

FAQs

  • What are ESG funds?

ESG mutual funds, also known as sustainable or socially responsible mutual funds, are investment options in India that integrate environmental, social, and governance factors into their investment decisions.

  • What are some of the metrics against which ESG funds are measured?

In addition to traditional financial metrics, ESG funds also often use specialized performance metrics to evaluate companies’ ESG performance. These can include carbon intensity, gender diversity ratios, water usage efficiency, and more. 

  • What are ESG equity funds?

ESG equity funds are simply equity mutual funds, but for companies that are complying with ESG criteria.

  • What are the best ESG funds in India?

Aditya Birla Sun Life ESG Fund, SBI Magnum Equity ESG Fund, and ICICI Prudential ESG Fund are some of the popular ESG funds in India today.

  • What are ESG fund returns like?

On average, ESG mutual funds are offered at an interest rate ranging from 10-15%.

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