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Should ESG funds form a part of your equity portfolio?

Dhirendra Kumar explains the investment case for such funds

Should ESG funds form a part of the equity portfolio? How are they different from a good flexi cap or a large and mid-cap fund?
- NM Rajugopal Shreedhar

These are early days for the ESG funds, and I don't think investors have enough options to make a credible choice. But the situation is evolving. In the Indian context, if some disclosures are being made available, the more important thing that will happen is that the ESG component of the mainstream fund will become a crucial determinant.

Also, what is good for society and the environment, is good for the business. Even before the ESG talk started to become mainstream, corporate governance in India has been one of the crucial differentiators of a long-term winner and 'an also ran' or 'a flash in a pan' company, which becomes a blockbuster only to disappear. So durable businesses should have this component embedded in them. From that standpoint, it is crucial.

But questions such as - how do we quantify, and how does it get defined measurably, I think those things are still far from becoming mainstream in India. If we can establish some correlation within the portfolio disclosures in terms of what part of the portfolio is not compliant or will not fit in with the definition of ESG, that itself would start contributing to the performance of the business. But, I would say at the moment, investors don't have enough choice in this space.

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