ESG stands for the non-financial parameters namely Environmental, Social, and Governance while investing. These parameters are increasingly becoming relevant to identify material risks and growth opportunities. Though ESG metrics are not commonly part of mandatory financial reporting, fund managers consider them as a guiding light at the portfolio construction level. Even companies are increasingly making disclosures in their annual report or in a standalone sustainability report. Numerous institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD) are working to form standards and define materiality to facilitate incorporation of these factors into the investment process
Investment philosophy for ESG funds may be multi-faceted. One approach may be to directly exclude the ‘sinʼ stocks, for example, stocks of companies marketing tobacco, alcohol, weapons, etc. Another approach is to place importance on impact investing. Impact investing is not only about generating financial returns but also about incentivizing positive environmental or social change. In essence, impact investing means providing capital to address widespread concerns that affect society as a whole.
ESG funds follow their self-developed techniques of assigning ESG scores to companies and on the basis of that they decide the companies that qualify to be a part of the fund. Typically, ESG funds prioritize technology, financial services, and consumer sectors and avoid energy, mining, and utility sectors. There are no norms for sector exposures governing such funds. However, most ESG funds place importance on a companyʼs carbon footprint, emission norms, resource utilization, and governance.
The data required to make an assessment of a companyʼs ESG footprint is not easily available in the public domain. It also has a certain cost to incur to procure it.