What Are ESG Funds?

ESG funds invest in companies screened for Environmental, Social and Governance factors — alongside financial merit. The idea behind ESG investing is that well-governed, sustainable businesses can be better long-term investments while aligning with your values.

What the three pillars mean

• Environmental — carbon footprint, resource use, pollution, climate risk.
• Social — employee treatment, safety, community impact, data privacy.
• Governance — board quality, transparency, promoter conduct, shareholder rights.

In India, disclosures like BRSR (Business Responsibility and Sustainability Reporting) make it easier to assess large companies on these fronts.

How ESG funds select stocks

They typically exclude certain sectors (e.g. tobacco, controversial activities) and favour companies scoring well on ESG metrics, often using third-party ratings plus their own research. Some also invest in green bonds.

Points to weigh

• Narrower universe — screening reduces the investable set, which can affect diversification and returns in some periods.
• “Greenwashing” risk — ESG labels and ratings vary in rigour; read what the fund actually does.
• Still equity risk — ESG doesn’t remove market risk.

ESG funds suit investors who want their values reflected in their portfolio. Returns aren’t guaranteed to beat (or lag) the market. Education only, not a recommendation.