A closer look at ESG sub-categories in mutual fund investments

In the world of finance, aligning your investments with your values is becoming increasingly important. If you’re looking to invest in high-performing mutual funds while staying true to your moral compass, you might consider exploring ESG mutual funds.

Understanding ESG Mutual Funds

ESG stands for environmental, social, and governance. ESG funds are thematic mutual funds that invest in companies committed to these principles. This means they seek entities that not only deliver financial returns but also demonstrate a commitment to environmental sustainability, social causes, and strong governance practices.

Widening Scope of ESG Mutual Funds

While ESG mutual funds have been around for a while, their scope has expanded recently. Previously, mutual fund houses were allowed to launch only one ESG scheme. However, a circular issued by the capital markets regulator SEBI in July last year now permits multiple ESG schemes, as long as they are launched with different investing strategies.

Different ESG Strategies

ESG mutual funds can be launched with various strategies:

• Exclusion: This strategy excludes securities based on certain ESG-related activities, business practices, or business segments.
• Integration: ESG factors are considered alongside traditional financial factors when making investment decisions.
• Best-in-class and Positive Screening: Investing in companies that perform better than peers on ESG metrics.
• Impact Investing: Seeking a positive social or environmental impact alongside financial returns.
• Sustainable Objectives: Investing in sectors, industries, or companies benefiting from long-term ESG trends.
• Transition Investments: Supporting companies that facilitate environmental and social transition.

Key Rules and Requirements

• ESG schemes must mention their strategy in the name of the fund.
• At least 80% of the total assets under management (AUM) of ESG mutual fund schemes must be invested in equity and equity related instruments of the particular strategy.
• ESG schemes are mandated to invest in companies with comprehensive business responsibility and sustainability reporting (BRSR) disclosures.
• From Oct 1, 2024, ESG schemes must invest at least 65% of their AUM in companies with comprehensive BRSR reporting and assurance on BRSR Core disclosures.

Conclusion

Investing in ESG mutual funds allows you to grow your wealth while supporting companies that are making a positive impact on the world. With the widening scope of ESG mutual funds and the various strategies they employ, there’s ample opportunity to invest in line with your values.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.