Environmental, social, and governance (ESG) funds
are investment vehicles that integrate financial analysis with consideration of
ESG factors. This holistic approach aims to identify and invest in companies
that demonstrate strong sustainability practices, thereby fostering responsible
business conduct and sustainable value creation.
Environmental criteria can encompass a company’s
Greenhouse gas emission, energy consumption, waste management, pollution
levels, natural resource conservation efforts, and treatment of animals. Social
criteria evaluate how a company manages its relationships with employees,
suppliers, customers, and the communities in which it operates. Governance
considerations include aspects such as leadership quality, executive
compensation practices, audit transparency, internal controls, and shareholder
rights. Investors are attracted to ESG funds as they are expected to generate
higher returns and lower investment risk over the long term.
Globally, the concept of ESG investing traces its
roots to early 20th-century social investment movements. However, it gained
traction in the 2000s, with the introduction of the United Nations Principles
for Responsible Investment (UN PRI) in 2006 and the Paris Agreement in 2015. By
the end of 2023, ESG funds were managing more than USD 30 trillion in capital
globally—close to 20% of total assets under management.
In India, there are only nine ESG funds, managing
USD 1.3 billion, which is less than 1% of capital managed by India’s
mutual funds. This relatively small amount is due to limited awareness and
understanding of ESG funds in India, their below-market performance in recent
years, and the lack of ESG fund reporting standards.