What is ESG investing (Environment, Social, and Governance) in the Mutual funds?

ESG investing (Environment, Social, and Governance) is all about strategizing investments based on sustainability factors. Investments are made in businesses that are environmentally friendly and socially responsible (i.e., they offer goods or services that benefit society) and follow ethical business practices. Companies with regulatory issues and higher carbon footprint or emissions are also avoided. Sustainable funds are driven by values, and investors stay invested in these funds for the long term.

ESG investing can take various forms. The ESG framework of investing tends to capture more factors, while green is more focused. Environmental factors include waste management, water management, environmental resource use, environmental disclosure, environmental impact, and reduction of pollution and emissions. Social factors include stakeholder analysis, workplace mentality, human rights, diversity community relationships, corporate citizenship, and philanthropy. Governance factors include board structure, management compensation, stakeholder impact, stakeholder rights, and the relationship between management and stakeholders.

ESG is a new lens through which investments can be analyzed, not an asset class. Thus, to build a strategy that suits each client, portfolio managers must balance ESG requirements with traditional risk and reward considerations. A successful ESG money manager typically engages in the following strategy: First, he will identify a set of compelling investments, based on his traditional investment selection criteria. Subsequent to doing so, he will apply an ESG lens to this set of viable investments. Last, but not least, he selects those investments that are anticipated to generate a scalable, profitable impact. Investors are still going to consider performance when selecting an investment manager. However, investment management firms may find that ESG metrics improve the opportunity to find alpha as well as attract new clients.