Avendus Capital Public Markets Alternate Strategies early this month launched its ESG (environment, social and governance) based fund — Avendus India ESG Fund.

The fund was announced in August 2018 and its first investments began on February 1, said the alternate asset management arm of Avendus Capital.

With the launch, interest has perked up among the investing fraternity about ESG. Currently, in the mutual fund industry, SBI Magnum Equity ESG Fund, erstwhile SBI Magnum Equity Fund, offers a thematic bet on companies which follow ESG norms. So, how is ESG analysed?

The ESG theme aims to generate superior risk-adjusted returns from socially responsible, environment-friendly and ethical firms, says the NSE, which has two indices — Nifty-100 ESG and Nifty-100 Enhanced ESG — based on this concept. Similarly, the BSE also has the S&P BSE-100 ESG index.

These indices keep out companies that are involved in any major environmental, social or governance controversy or engaged in the business of tobacco, alcohol, controversial weapons and gambling operations.

Every company is given an ESG score based on environmental, social and governance parameters. Evaluation is done on the company’s performance on each criteria with a weighted average score in the assigned range of 0-100.

Besides, it also assesses the company’s involvement in incidents and controversies that may potentially imply higher risk to investors.

Beats benchmark

Currently, at 10.94 per cent, Reliance Industries commands the highest weightage in Nifty-100 ESG followed by HDFC Bank (7.84 per cent), HDFC (7.14 per cent) and Infosys (6.85 per cent).

As of January 31, this index had posted a return of 0.26 per cent over the three-month period, and 13.69 per cent for a five-year frame. This compares well with the performance of the Nifty-100 index that had posted a negative return of 1 per cent and 12.97 per cent, respectively.

Key risks

However, for Indian investors, the available pool of companies is limited. This is one of the major reasons why fund houses are not launching these thematic schemes in a big way.

CEOs/CFOs should perhaps be trained to understand the potential challenges from sustainability risks such as climate change, natural resource depletion and supply chain impacts, and tackle them effectively. It is only lately that awareness on sustainability risks and addressing and reporting them are slowly gaining importance among CEOs/CFOs.

Besides, identifying ‘valuable’ companies from the available pool is also not simple, as ESG components may not be disclosed in financial statements, though some firms do. It is advisable that SEBI and exchanges start directing companies to regularly disclose their ESG targets and performance to help investors and fund managers.

Unless awareness reaches ground zero, the concept of ESG investment may take a very long time to spread wings.