Winds of change

ESG investing is gathering momentum

47-Anuja-Agrawal Anuja Agrawal

THERE IS A category of funds in Europe that saw record inflows of nearly $65 billion in just three months between April and June. The category saw an unprecedented inflow totalling $10.4 billion in the US market in the same period. Combined with the first three months of 2020, the cumulative half-year flows in US stood at $20.9 billion, which is just a tad lower than 2019’s full year flows of $21.4 billion.

So, which is this category of funds that investors are falling over each other to invest? What is the potential they see, especially amidst a global pandemic that has caused most asset class losing their sheen?

Welcome to the world of Environmental Social and Governance Funds, popularly known as ESG Funds. It is also called sustainable investing by a growing community of fund managers and investors who believe that the time has come to look at companies that respect factors like responsibility towards the planet, social obligations and good corporate governance.

What is an ESG Fund?

Simply put, an ESG Fund would only invest in companies that incorporate in their operations and functions, things like efficient disposal of waste, conservation of water and energy, climate change, gender equality, women empowerment, labour rights, donating for social causes, strong internal controls in terms of efficient management and ethical practices among other things.

In terms of broad sectors, companies involved in alcohol, tobacco, gambling and controversial weapons are often kept out of ESG ambit.

One may feel that while ESG is quite big on the global scale, it is still nowhere in the reckoning in India. Quite true to a large extent, but the winds of change are here, and could be here to stay for the long haul.

Return generation potential

Let us first see the benefits of ESG investment in terms of returns—after all returns are what everyone invests for—and then the options that Indian investors have.

Not many might be aware but there is a Nifty 100 ESG index that serves as the benchmark for the few ESG Funds that are offered by mutual funds in India. More importantly, the ESG index has managed to outperform the benchmark Nifty in the recent past as Covid issues continue to impact the stock market.

From the highs in January, the 50-share Nifty fell by around 40 per cent by March and since then has gained a little over 53 per cent. On the other hand, the ESG index fell around 37 per cent between January and March and since then has surged over 56 per cent.

In terms of total returns, an investment of 0100 in ESG index would have got you 0226 in the last nine years while the same in Nifty would have made 0198. So, numbers clearly favour ESG index over the benchmark Nifty.

Incidentally, in the current calendar year, the ESG index is marginally in the green while the Nifty is down nearly 5.50 per cent.

Investment avenues

Now, the all-important part of investment avenues. Well, if the returns are there then investment options are what one needs to know. As mentioned earlier, there are not too many options currently though three fund houses—Axis Mutual Fund, SBI Mutual Fund and Quantum Mutual Fund—offer ESG Funds.

ICICI Prudential Mutual Fund has come out with a New Fund Offer (NFO) of its ICICI Prudential ESG Fund which is currently underway and is open till October 5, 2020. The fund will have both growth and dividend options along with the option of direct plan in both the variants.

Corporates today are increasingly aware that millennial generation is increasingly mindful of the ESG practices they follow. Also, regulations are catching pace in the ESG space, all of which is leading to more compliance in terms of ESG practices. At such a time, it is interesting to see that an increasing number of fund managers and investors are looking at ESG investing. In the years ahead it is very likely that deep pocketed pension funds, large institutions and even millennial, which account for 60 per cent of our population who are comparatively more aware of environmental and social issues, would actively scout for ESG complaint funds to invest their money.

The writer is managing director, InvestAscent Wealth Advisors Pvt Ltd.