Environment, Social, and Governance (ESG) investing works on a simple principle — a company that is responsible towards its environmental, social, and governance footprint can be expected to grow sustainably.
ESG investment as a theme focuses on businesses that…
Conserve the environment
Honour its commitments towards the society
Follow transparent, fair, and good governance practices
While governance aspects had always been important for some investors, environmental and social aspects have been gaining prominence amid rising environmental concerns as well as the COVID-19 pandemic. This has pushed companies/policymakers in India and around the globe to evaluate the impact of their actions on society and the environment. Inspection of the implementation of regulations related to the ESG factors has become stringent and non-compliant companies are being penalised.
ESG investing is growing at a steady pace in India, especially via the mutual fund route. In fact, this was a less-known strategy in India a couple of years back, until SBI Mutual Fund reclassified its SBI Magnum Equity Fund into a ESG theme fund in 2018.
Today, there are a total of nine ESG mutual fund schemes on offer, of which 6 were launched in the year 2020. As a result, the AUM of ESG Funds in India has grown by over four times to Rs 11,864 crore as of January 2022 from Rs 2,749 crore as of January 2020.
Table: Performance of ESG Funds
|Scheme Name||Absolute (%)||CAGR (%)|
|1 Year||2 Years||3 Years||5 Years||7 Years|
|Quant ESG Equity Fund||58.07||—||—||—||—|
|Aditya Birla SL ESG Fund||25.56||—||—||—||—|
|SBI Magnum Equity ESG Fund||19.24||21.69||19.37||16.19||13.16|
|Kotak ESG Opportunities Fund||18.15||—||—||—||—|
|Quantum India ESG Equity Fund||17.38||25.52||—||—||—|
|Mirae Asset ESG Sector Leaders FoF||14.97||—||—||—||—|
|Axis ESG Equity Fund||13.83||—||—||—||—|
|ICICI Pru ESG Fund||11.36||—||—||—||—|
|Invesco India ESG Equity Fund||—||—||—||—||—|
|Nifty 100 ESG Index – TRI||21.12||26.61||21.23||—||—|
|NIFTY 100 – TRI||18.94||22.33||18.46||15.88||12.48|
|NIFTY 500 – TRI||22.71||24.57||19.96||15.98||13.00|
Direct Plan – Growth Option Considered
Data as on February 10, 2022
(Source: ACE MF)
Why it makes sense to invest in ESG Funds now…
ESG investments are rising globally. According to Bloomberg Intelligence, ESG AUM is expected to grow to USD 53 trillion (from USD 38 trillion) by 2025 fuelled by increasing investor demand, emerging regulatory requirements, and the launch of several ESG funds. This means, nearly one-third of the total global Assets Under Management (AUM) would be ESG AUM by 2025.
Moreover, the debt-oriented ESG AUM is expected to swell five times from the current USD 2.2 trillion to USD 11 trillion by 2025. So far, Europe and the U.S. have been at the forefront of the ESG quest. In the Asia-Pacific region Japan, in particular, is expected to catch up very fast over the next few years.
In India as well, the ESG theme has gained ground of late as denoted by the growing AUM of ESG Funds. Giving further boost to ESG investing in India, Finance Minister Nirmala Sitharaman in the Union Budget for 2022-23 laid a lot of emphasis on projects focusing on climate action and sustainable development.
Notably, at the CoP26 conference held recently, Prime Minister Narendra Modi had committed India to become a ‘net zero’ carbon emitter by 2070, and announced enhanced targets for renewable energy deployment and reduction in carbon emissions.
Here are some of the announcements made in the Union Budget 2022 that could potentially drive growth for various companies that are responsible from social, environment, and governance point of view:
The government will promote chemical-free natural farming throughout the country.
Production of millets will be promoted as these crops can withstand extreme temperatures and have low carbon footprint. The government will provide support for post-harvest value addition, enhancing domestic consumption, and for branding millet products nationally and internationally.
The government has allocated Rs 60,000 crore for its 'Har Ghar, Nal Se Jal' programme that aims to solve India's water crisis by providing piped water connections to every household by the year 2024.
A high-level committee of reputed urban planners, urban economists and institutions will be formed to make recommendations on urban sector policies, capacity building, planning, implementation, and governance.
In view of the fast growing urban population, the government will promote a shift to use of public transport in these areas. This will be complemented by clean tech and governance solutions, special mobility zones with zero fossil-fuel policy, and EV vehicles.
Considering the constraint of space in urban areas for setting up charging stations at scale, the government will bring in a battery swapping policy and will formulate inter-operability standards. Additionally, it will encourage the private sector to develop sustainable and innovative business models for 'Battery or Energy as a Service'. This will improve efficiency in the EV ecosystem.
The government will contribute towards R&D opportunities in sunrise segments such as Artificial Intelligence, Geospatial Systems and Drones, Semiconductor and its eco-system, Space Economy, Genomics and Pharmaceuticals, Green Energy, and Clean Mobility Systems have immense potential to assist sustainable development at scale and modernize the country.
To facilitate domestic manufacturing for the ambitious goal of 280 GW of installed solar capacity by 2030, the government will make an additional allocation of Rs 19,500 crore for Production Linked Incentive for manufacture of high efficiency modules, with priority to fully integrated manufacturing units from polysilicon to solar PV modules.
As a part of the government's overall market borrowings in 2022-23, it will issue Sovereign Green Bonds for mobilizing resources for green infrastructure. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy.
Therefore, the strong emphasis on sustainable development proposed in the Union Budget could create an enabling environment for ESG adoption in India, which in turn could potentially give a boost to ESG investing. This makes it worthwhile to consider investing in ESG Funds with a long term view.
Things to keep in mind before you invest in ESG Funds
Investing in ESG Funds is worthwhile because it offers a solution for eco-conscious, responsible investors. The portfolios of ESG funds could differ from other diversified equity funds, making it a worthy choice from a diversification point of view.
However, there are challenges that ESG Funds face in stock selection because of a lack of standardisation of reporting. Notably, many companies in India do not disclose sufficient information related to sustainability. This could change after SEBI’s proposed framework on ESG related reporting by companies comes into force.
SEBI has made it mandatory for the top 1,000 listed companies by market capitalisation to file Business Responsibility and Stability Report (BRSR) from the financial year 2022-23. With the growing number of companies disclosing sustainability related information, the basket for ESG Funds will grow.
Additionally, in view of the increasing demand from the investors on evaluation and rating of ESG related parameters by ESG ratings providers (ERPs), SEBI has proposed a framework to regulate ERPs. This will help reduce reliance on unregulated ESG rating providers that often lack transparency thereby posing risk to investors’ capital.
Though ESG is currently a niche segment in India, over the years it could gather momentum like it has globally. As we can see in the table above, the Nifty 100 ESG Index has shown health performance compared to the Nifty 100 and Nifty 500 index since its inception about 4 years ago.
Nevertheless, keep in mind that investing in companies having a sustainable future does not automatically safeguard you from the risks associated with markets and stock selection.
If you are hoping to make some positive difference to the world by investing in a socially, environmentally responsible, and ethical companies, consider investing in worthy ESG Funds. Just ensure you have a high-risk profile and an investment time horizon of at least 5 years.
This article first appeared on PersonalFN here