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Equity investment based on environmental, social and governance (ECG) practices is gradually gaining traction in India, helped by the strategy’s relatively strong performance during the pandemic.
Since the country’s first ESG fund launched in 2018, three more have entered the field, with the category now making up 0.6 per cent of total equity assets under management (AUM), data compiled by Bloomberg and from the Association of Mutual Funds in India (AMFI) show. The appeal is financial as well as socially minded, with the best performing of the new entrants recently climbing back into the green for the year, outperforming nearly 80 per cent of its peer group. The Nifty 100 ESG Index is down 2.8 per cent versus an 8.1 per cent drop in the NSE Nifty 50 Index.
The global push into sustainable investing has gathered pace this year as governments channel virus-related recovery funds into health and environmental projects. Fund industry ESG AUM now exceeds $1 trillion, and 56 per cent of sustainable funds outperformed their peers in the second quarter, according to a report from UBS Group AG citing Morningstar Inc data.
“Stronger companies that have solid principles around ESG have been able to weather the storm well,” said Jinesh Gopani, head of equities at Axis Asset Management Co, which launched its first ESG fund in February. “They both fell less and bounced back first.”
ESG strategies are still less established in emerging markets than in the US, where they account for 1.4 per cent of AUM, according to data compiled by Bloomberg. But the category’s effectiveness through the pandemic-triggered global sell-off and subsequent recovery is seen drawing more investors looking for resilience against future upheavals.
Most of India’s new sustainable funds use in-house and third-party research to assign scores to companies for various ESG metrics to short-list a pool of stocks eligible for investment. Reliable data can be hard to come by in developing markets, but that may start to change as ESG funds become more common.
ESG pressure
“More asset managers are making ESG research a core part of their investment research,” said Ruchit Mehta, who manges the SBI Magnum Equity ESG fund, India’s oldest and largest fund in the group with about 27.5 billion rupees ($367 million) in assets. “There’s a rising appreciation among investors, as more and more companies face issues beyond the traditional balance sheet, growth and governance challenges.”
India’s market regulator requires firms to disclose their ESG policies in a standardised format. Corporations have begun to take this a step further, voluntarily disclosing more than the minimum due to pressure from investors and growing institutional appetite for sustainable options, according to Aditi Chandani, an analyst at Stakeholders Empowerment Services, a Mumbai-based research and advisory firm.
“Three years ago it would have been peripheral,” Chandani said. “Now investors are seeking more comprehensive disclosures, what targets companies are setting and how their performance compares to peers.”
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