Q. I am Neena, in my late 60’s. My husband and I are already enjoying retirement. I am concerned about the world we are leaving behind for our children. I want to make a positive impact on the environment through my investment. For this, I want to make a conscious effort to move my investments to ESG funds. Please advise.
As you must be aware, ESG funds invest in companies that work to ensure:
- A greener Environment (reduce carbon emissions, have a sound waste disposal system, focus on conserving energy and water, and other pro-nature measures).
- A healthier, more just, society (employee welfare, gender equality, pay parity, and regular contributions to relevant social causes).
- Positive corporate Governance (regulatory compliances, grievance redressals, effective whistleblower policies, and ethical code of conduct).
Of course, as always, your returns would depend on the performance of the companies the fund invests in. However, the commitment to ESG can help to ensure the performance is not compromised by any act of fraud or negligence pertaining to the three dimensions.
Neena, please be aware that, currently, India offers limited options in ESG funds. Most of these funds are experiencing outflows.
Picking an ESG company
From the financial year 2022–2023, SEBI has mandated that the top 1,000 listed entities (by market capitalisation) should submit a Business Responsibility and Sustainability Report (BRSR) every year. The entities are required to report on various sustainability and responsibility aspects of their operations, including the ESG factors. Common disclosure areas include environmental impact, social responsibility, diversity and inclusion, corporate governance, ethics, and more.
These reports are publicly available, and you can go through these reports before investing in a specific company. If your investment target is an ESG-compliant mutual fund, please refer to the Scheme Information Document (SID) of the fund that will yield the ESG information you seek.
ESG investment options
ESG mutual funds: These investment funds specifically select companies or bonds based on the ESG criteria. The focus may be on generic ESG compliance or on a specific theme (like clean energy, gender diversity or community development).
ESG-themed stocks and bonds: You can directly purchase individual stocks and bonds of companies that score well on ESG criteria. Again, you may want to pick a specific theme—like renewable energy, clean technology, or social responsibility.
Green bonds: Green bonds are fixed-income securities issued by governments, municipalities, or corporations to fund environment-friendly projects. These bonds are labelled as "green" and have specific use-of-proceeds requirements, which ensure that the funds are used for projects intended to have a positive environmental impact. In 2023, RBI had issued its first tranche of green bonds. More such bonds are expected, and you may invest in these through your broker or your demat account.
Private equity and venture capital: Some private equity and venture capital funds focus on sustainability, clean technology, or social impact. You may also invest in these.
Customised ESG portfolios: Financial advisors and asset managers may choose specific stocks that consistently meet ESG criteria and create “smallcase” ESG portfolios.
The availability of ESG investment options may vary by region and market. Please conduct a thorough research and exercise due diligence when considering ESG investments.
ESG investment action plan
- Obtain the list of ESG mutual funds in India.
- Track those. Compare their performance. How does each fare against a broad index such as Nifty 500? Ensure there are sufficient assets under management and no company is under a cloud for any regulatory or management infraction.
- After you make a careful selection, start by investing 3% to 5% of your total funds. Monitor regularly. You are advised caution as the ESG investment space is still new.