Evolution of ESG mutual funds in India and the parameters involved in screening

ESG mutual funds stands for investments that use Environmental, Social and Governance parameters in screening companies...

ESG stands for Environmental, Social and Governance.  What is  the meaning and the full form of ESG mutual fund? Let’s take look at it piecemeal.

The E of ESG mutual funds
“E” stands for the Environment. This means how does a company deals with the preservation and conservation of natural resources. How can it impact the future of the company?

There are two answers to this question. One is the ‘Regulatory’ impact, that with the evolution of the competitive landscape in India, stricter controls have been set for standards of environmental conservation, climate change and pollution control. Companies have to be more environmentally conscious, not solely to maintain a strong balance sheet but to maintain the balance of nature for a better tomorrow.

The S of ESG mutual funds
“S” stands for Social. When it comes to social, ESG looks into how does the company look after the health of their employees, safety and well�"being. These incorporate several initiatives taken to ensure the employee health and safety, that include well designated safe zones in factories, or health checkup camps for all employees. Social concerns not just the quality of work, but also go beyond the quality of life for the employees. It includes employee benefits, gender diversity, inclusion, etc.

The S is not just about the employees. It also encompasses the treatment of minority shareholders. Does the company treat its shareholders equally? A sustainable business is one that exhibits complete parity in treatment to its minority and large stakeholders.

“S” also looks at what the company is doing for Society at large. Does the CSR budget get spent towards improving the society in which the company operates? Does it collaborate with the nearing not-for-profit foundations? Does it provide for improvement of education, healthcare and facilities for uplifting the society?

The G of ESG mutual funds
“G” is for Governance. This is the base, the foundation on which the company is run. By governance standards, we do not mean mere compliance on audits and GAAP standards, but going beyond financial disclosures and implementing the best practices in action and spirit. We have seen several examples of companies who claim high governance compliance, but on closer look fail the ground reality. ESG oriented companies will have the highest standards of governance.

 

Corporate India will continue to face stricter adherence to regulations. Be it environmental parameters, societal impact, or financial disclosures, the Regulators are necessitating greater compliance and the penalties for those who deviate from the prerequisite standards. Standards of E, S and G are going to be the parameters on how the companies and judges and screened.

 

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