Of late, the momentum and conversation around ESG (environmental, social, and governance) investing has been gaining a lot of ground. More investors, in a bid to become socially responsible and environmentally conscious, are pouring funds into companies that choose sustainable growth and are compliant with ESG guidelines.
As per data from Morningstar, there has been a steady increase in AUM (assets under management) of ESG funds in India. In 2019, their AUM stood at Rs 2,268 crore. This skyrocketed to Rs 12,447 crore as of March this year.
Globally also, the AUM of ESG funds has grown exponentially. While this figure is currently at $2.7 trillion, data from Bloomberg Intelligence predicts that ESG AUMs will accelerate to over $53 trillion by 2025. This would mean ESG funds would make up a third of the total global AUM.
Millennials, particularly, are twice as likely to be more conscious about fulfilling their social and environmental responsibilities, stated a 2017 Morgan Stanley survey. Additionally, recent research by Audencia business school, Auckland University of Technology, and the University of Adelaide have also shown that there’s a higher probability of one investing in sustainable, environment-friendly assets i.e. ESG funds when they’re feeling pessimistic or low. This can be traced down to the global downturn of sentiments post-2019, after the onset of Covid-19.
But what are ESG funds? And should retail investors go for them?
Shriram Sharma, investment advisor, Elevo by Tarrakki, says: “ESG investing has grown in popularity in recent years and referred to in many different ways, like sustainable investing, socially responsible investing, and impact investing. ESG practices include strategies that select companies that supported their stated commitment to one or more ESG factors. For example, companies with policies aimed toward reducing their environmental impact or focusing on transparency and governance principles.”
“ESG practices can also entail screening out companies in certain sectors that, in the view of the fund manager, have shown poor performance with reference to the management of ESG risks and opportunities. Ethical practices towards the environment may include reduction in carbon footprint, energy efficiency, conservation, and biodiversity protection. As part of the social criteria, human rights, gender diversity, equal opportunities, and safety are considered. Governance factors include business ethics, whistle-blower schemes, board diversity, executive compensation, and tax management,” he adds.
However, one contention that has consistently haunted ESG funds is the lack of clarity and transparency around their reporting and evaluation of factors, which determine whether a company is socially, and environmentally conscious or not. This makes it extremely tough for retail investors to make well-informed decisions about investing in this space.
Veteran financial planner Sanjeev Dawar says: “Instead of making this assessment on your own, it’s far more effective to pick large-cap companies whose vision and mission seem aligned to these themes. Easier still is to invest in an ESG fund where investment automatically gets exposed to a number of companies who believe in this theme.”
How well do these funds fare on the parameters of returns? Sharma says, “A study showed that last year, the Nifty 100 ESG Index outperformed the Nifty 50 by registering better returns of 51% (compared to the Nifty ’50s 47%). ESG funds displayed better performance ratios than non-ESG funds over an extended duration of five to 10 years. As an investor, one must concentrate on some important aspects of ESG investing. Many ESG funds have sectoral bias and are overweight technology firms and financial companies.”
“While, overall, ESG can be a good option to park a certain percentage of your portfolio, there is still a need to wait and watch the development of this segment in India,” he said.
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