ESG INVESTING REMAINS FRAUGHT WITH CHALLENGES

ESG funds can play a significant role in promoting sustainability measures

- Ranjith Krishnan & Usha Ganapathy Subramanian

With global warming, dwindling biodiversity and rising pollution threatening posterity and widening economic disparities, campaigns such as Race to Zero and the United Nations' Sustainable Development Goals matter more than ever. Investors these days are conscious about where their money goes, and environment, social and governance (ESG) has evolved as a framework to back businesses that take the conscientious route to profits. ESG funds have found favor among investors globally because they help meet responsible-investing goals while entrusting the arduous stock-selection process to fund managers.

ESG funds are mutual funds or managed investment schemes that take into account the ESG performance of companies when deciding stocks in the portfolio. An ESG fund may be actively managed, with fund managers cherry-picking the stocks, or passively managed like index funds or exchange-traded funds (ETFs).

ESG funds have the potential to play a significant role in promoting sustainability measures. They are not project finance, meaning they may not back specific sustainability projects of businesses. Rather, they ensure funds flow to companies that are deemed well-governed and socially and environmentally responsible based on the ESG criteria evolved by fund managers.