Investors screen companies based on their sustainability compliance scores, and ESG metrics have enabled investment firms to satisfy investor requirements. One result of the increased focus on corporate sustainability is ESG funds. This post will describe different components of ESG funds with examples.
What is an ESG Fund?
ESG funds are financial investment vehicles offered by private equity firms, mutual fund managers, and portfolio management solutions. These funds utilize environmental, social, and governance indicators to prioritize sustainable companies in their stock selection.
However, ESG metrics and performance calculation methods vary across regional sustainability accounting frameworks. So, investors and business owners depend on ESG consulting to evaluate their compliance ratings.
Consider that an investment fund, company stock, bond, or real estate project claims to comply with ESG criteria. Investors will require objective data analytics to cross-examine the validity of such claims. Besides, sustainability benchmarking can reveal other investment opportunities with a better balance between ESG compliance and business growth potential.
Nevertheless, many ESG funds utilize strategies like excluding corporations known for ethically ambiguous practices and offerings. For example, an ESG fund can avoid including an alcohol business in its portfolio due to the social impact concerns.
Types of ESG Funds
1| Ethical Funds
Consulting firms can help you shortlist the funds that use morality, social ethics, faith, and a broader concept of “doing good.” Such mutual funds are ethical funds, and ESG solutions can help investors study more holistic data and their performance.
Each society has unwritten rules, such as keeping children safe or respecting elderly citizens. These values drive investor behavior, resulting in the rise of ethical investing. Imagine high net-worth individuals (HNWI) investing in an ethical fund after a social impact analysis. The “benefit” emphasizes the religious, moral, and political gains rather than returns.
Consider an ethical fund that utilizes the raised funds to eradicate the malnutrition crisis in the world’s underdeveloped areas. Some investors will use their political views to determine companies that deserve financial assistance.
These concepts often correlate with intangible gains like the religious concepts of virtues and vices. Therefore, some investors request ESG consulting firms to screen ethical funds irrespective of a lower return on investment (ROI).
2| Social Impact Funds
Social impact investing involves corporate stocks related to renewable energy companies or forest and biodiversity conservation. ESG solutions can research the socially positive impact of an enterprise to evaluate whether it qualifies to be in the investment portfolio of social impact funds.
While ethical ESG funds investors leverage religious, moral, or political investor philosophies, social impact funds exclusively emphasize how an investment benefits society. For example, supporting vocational e-learning platforms increases the economic competitiveness of a demographic.
Likewise, some social impact funds garner capital support from non-governmental organizations (NGOs), insurance companies, banks, cooperative societies, and HNWIs. ESG consulting firms consider the social impact funds advantageous due to a more objective outlook driven by tangible gains.
After all, quantifying and modeling statistical data on literacy rates, rehabilitated substance abusers, or renewable energy research outcomes is possible via appropriate ESG solutions.
3| Green Funds
Green funds select portfolio companies by studying the environmentally harmful or beneficial effects of corporate activities. For example, ineffective waste management causes pollution of water bodies. If an animal or human consumes water from these resources, they become ill. Polluted water can also damage trees through soil seepage near the roots.
Investors want to support organizations that realize the ecological cost of industrial development. Such companies always discover recycling and waste reduction technologies. Therefore, ESG consulting firms list green funds as the ones that include only environmentally responsible brands in the portfolio.
Nevertheless, the performance of a green fund will fluctuate due to market trends. You want to balance environmentalist investor activism with holistic risk management. Otherwise, your capital resources will become available to a less reliable enterprise. If an investor experiences a significant loss due to green fund investments, their ability to support other eco-friendly brands diminishes.
Green funds still witness a rise in demand because more investors are utilizing ESG solutions to screen the companies working on renewable energy, forest preservation, pollution analytics, and animal protection projects.
Screening Strategies Employed by the Best ESG Funds
1| Compliance Benchmarking
An ESG score relies on the company’s performance across sustainability accounting metrics. You can estimate it using statistical models. Still, different ESG solutions will develop proprietary performance assessment methods. Therefore, investors must monitor multiple online databases to determine whether a company is committed to sustainable development goals.
Compliance benchmarking uses a single performance management system to determine ESG scores. It reveals the business risks associated with unsustainable operations. So, the manager can selectively address these issues that reduce their ESG score.
A benchmark involves reference values to help with progress monitoring over time. Managers and investors require compliance benchmarking to check how a company has improved its ESG performance. The ESG Funds leverage benchmarking when selecting stocks for their portfolio.
2| Peer Analytics
Two eco-friendly companies can have significant differences across ESG performance metrics. Likewise, businesses working in different industries might exhibit identical ESG compliance ratings. However, comparing them with their business rivals in the same industry gives you a clearer estimate of their sustainability.
Peer analytics investigates multiple organizations to identify the best fit for investors’ preferences and risk profiles. You can quickly learn about which company tops the environmental compliance charts. Later, ESG funds use these insights to distribute their financial resources across the most sustainable companies.
3| Greenwashing Inspections
A brand’s reputation as an ESG-first enterprise must be authentic. Verifying the validity of what a company claims as its sustainability performance can assist the investors in separating the gene the genuinely eco-friendly organizations from the companies that apply greenwashing tactics.
Greenwashing is a result of unethical marketing and ESG report manipulation. It includes creating and falsifying sustainability compliance datasets. So, the company’s compliance ratings seem better than the accurate scores. Professional ESG consulting firms always inspect sustainability disclosure documents to identify greenwashing attempts.
4| Controversy Intelligence
Historical performance records associated with an organization can be instrumental in verifying the legitimacy of its ESG compliance claims. Controversy research and intelligence gathering will allow the fund managers to audit a company’s brand presence across multiple media outlets.
Innovative ESG solutions exist today, featuring scalable social listening capabilities and press coverage analytics. Their essential services include tracking how often publications and social media mention a corporate brand.
Investment strategists can also benefit from more advanced social media listening tools like sentiment analytics and materiality assessment. For example, an organization might have an attractive ESG score greater than 90. Simultaneously, some controversial events could have a particular connection with this organization, and ESG funds will consider it in screening.
Examples of ESG Funds
1| Joint Sustainable Development Goals (SDGs) Fund
The United Nations (UN) created a financial vehicle known as SDG Fund in 2014. This financial mechanism used to have many backers among the UN’s member countries and philanthropists when it was operational. However, the Joint SDG Fund is its latest spiritual successor. It also champions a multi-dimensional cooperative approach to address sustainability integration challenges.
Several agencies help United Nations deliver on-ground support to the marginalized, financially weak, and old individuals in over 23 geopolitical territories through this fund. The Joint SDG Fund concentrates on solving the contemporary social-economic and environmental challenges by promoting the following.
- Universal access to authoritative educational resources on climate change,
- Social protection systems for the workers in informal sectors,
- Scientific breakthroughs vital for sustainable development,
- Energy-efficient technologies and research innovations,
- Disaster risk management and response strategies,
- Availability of clean drinking water.
The characteristics of the joint sustainable development goals fund qualify it as an ESG fund. Therefore, some ESG consulting firms recommend this financial vehicle to environmentally conscious investors.
2| Vanguard FTSE Social Index Fund (VFTAX)
VFTAX tracks US Select Index Series termed FTSE4Good. The Financial Times Stock Exchange (FTSE) index series emphasizes environmental, social, and governance practices. So, VFTAX utilizes this resource to screen portfolio companies and corresponding stocks.
This ESG fund excludes the enterprises creating “vice products” like gambling, adult entertainment, tobacco, and addictive beverages. Investors will observe that VFTAX also avoids corporations relying heavily on non-renewable energy resources.
Besides, any company involved in controversies and discriminatory practices will not make it into the VFTAX portfolio. Moreover, it excludes businesses creating weapons systems for the military and civilians.
VFTAX has a low expense ratio. The minimum investment value is 3000 USD. Institutional investors should also consider VFTNX related to this social index fund, requiring 5 million US dollars. Its portfolio comprises Amazon Inc., Alphabet Inc., Microsoft Corp, and Apple Inc.
Conclusion
ESG funds utilize sustainability accounting frameworks for portfolio management. Investors conscious about how companies affect the world prefer ESG-based investment strategies. Therefore, modern ESG consulting firms develop statistical models to quantify corporate compliance across sustainability metrics.
Mitigating carbon risks, affordable Healthcare, rehabilitating substance abusers, and offering universal access to clean water are the admirable objectives of sustainable businesses. High net-worth individuals (HNWI) and institutional investors also want to make a positive impact.
So, ESG funds allow them to cooperate for ethical, religious, political, social, environmental, and humanitarian development. Still, compliance assessment, monitoring, and reporting remind advanced technological assistance offered by talented domain experts.
A leader in ESG solutions, SG Analytics, empowers organizations and investment managers to conduct holistic analytical operations for sustainability reporting and impact investing. Contact us today for automated multilingual analytics across 1000+ indicators to increase compliance ratings.
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