Will ESG-based investing take clear shape in 2020?

KS Badri Narayanan Chennai | Updated on December 21, 2019 Published on December 21, 2019

Clarity on concept, need of the hour

Despite over a decade of existence, the concept of environmental, social and governance (popularly known as ESG) investment is still misunderstood by a large section of the investor fraternity.

Unlike traditional fund managers who evaluate a company’s fundamentals and key ratios for investment purposes, ESG investment is a comprehensive approach that also takes into account environmental, social and governance factors.

Assets under management (AUM) for ESG products, mainly exchange traded funds, have gained significantly since 2015, as investors and activists world over demand that fund managers invest in companies that are socially responsible. According to Pensions & Investments, worldwide ETFs focussed on environmental, social and governance issues had more than $13.5 billion in total AUM at the end of August 2019.

A recent survey by Morgan Stanley said that there is growing interest for ESG products. According to it 85 per cent of investors surveyed had indicated that they are interested in investing such companies and interestingly 95 per cent of them are millennial.

However, in India, the concept is still at a nascent stage. Only two fund houses — SBI and Quantum, have ESG-based schemes while Kotak Mutual Fund and ICICI Prudential have filed papers with SEBI for such schemes. The alternate asset management arm of Avendus Capital has launched India’s first $1 billion ESG-based fund.

Mixed show

Both the BSE and the NSE, have launched ESG-based indices with 100 constituents. NSE, in fact, has an ESG Enhanced Index too. 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. Besides, another criteria is the company’s involvement in incidents and controversies that may potentially imply higher risks to investors.

The Nifty ESG Enhanced 100 Index has gained 45.89 per cent in the last five years, while the Nifty ESG100 gave 45.14 per cent. Comparatively, the Nifty Midcap gave a better return of 47.99 per cent and the Nifty-50 benchmark even bettered at 48.95 per cent. The Nifty SmallCap index, however, gave just 19.36 per cent in the last five years.

No consistency

On a three-year scale, NSE Enhanced ESG and NSE ESG100 have outperformed NSE Midcap100 by a large margin.

With the fund flows rising quite significantly in recent times, the US Securities Exchange Commission has started scrutinising ESG products, as there is confusion on how to define ESG and implement strategies.

“I think the first issue is that we don’t even know what ESG means,” said the SEC Commissioner Hester Peirce in an interview to CNBC. “So, I think defining that would be an important first step before trying to develop metrics,” she said. Hopefully, the scrutinisation by SEC would throw more light about the concept and much needed clarity to investors.

It would not be a surprise if market regulator SEBI too follow suit, given the quality and quantity of companies in India. In fact, SEBI recently enhanced the list of companies required to disclose their annual business responsibility report based on shareholder relationships, social, environment and corporate governance from the top 500 to the top 1,000.

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Published on December 21, 2019
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