Slate

All you wanted to know about ESG funds

Dhuraivel Gunasekaran | Updated on March 02, 2020 Published on March 03, 2020

Global pension funds and other large investors are moving money to ESG (Environmental, Social and Governance) investing. The Indian mutual fund industry, always quick to capitalise on such themes, has rolled out new funds for investors based on ESG investing too.

Currently, there are three funds — SBI Magnum Equity ESG, Quantum India ESG Equity and Axis ESG — following the ESG investment strategy in India. Fund houses such as ICICI Pru, DSP, Aditya Birla, Kotak and BNP have also filed draft offer documents with SEBI and are awaiting approval.

What is it?

The ESG strategy revolves around investing in companies that score high on three non-financial parameters — environment friendliness, social responsibility, and governance. They focus is on companies that adopt environment-friendly practices, produce products or services that influence society positively and conduct their business ethically.

While there are no strict norms on what constitutes ESG companies, each fund house follows different parameters to assign scores to companies on ESG to short-list stocks. Most funds though exclude sectors that are deemed harmful from a social perspective such as tobacco, liquor and gambling. On the environmental side, they check for a company’s carbon footprint, emission norms, water consumption, waste recycling and energy practices. They also avoid firms with poor governance which have had regulatory issues.

Why is it important?

ESG investing is based on the idea that only pressure from large investors can force the corporate world to behave responsibly from a social, environmental and governance perspective. Secondly, factors such as climate change, shifts in societal preferences and governance issues do pose risks to corporate earnings and thus to investors in stocks. Companies that are aligned with ESG norms usually have lower risk of losses due to these factors. Thus, investing in firms with a high ESG score in believed to translate into enhanced value for investors in the long run.

The Nifty 100 ESG Index, which was designed to reflect the performance of companies within Nifty 100 index based on the ESG score, has outperformed its parent index Nifty 100 across various timeframes.

The Nifty 100 ESG Index has delivered a compounded annual return (CAGR) of 4.6, 9.3 and 7 per cent in the last one-, three- and five years while the Nifty 100 index posted 4.5, 7.8 and 6.4 per cent respectively. As on January 2020, the Nifty 100 ESG had 88 companies spread across 16 sectors. Fours sectors — financial services, IT, consumer goods and energy — accounted for 74 per cent of the index.

Why should I care?

Globally about $2.96 trillion has been invested in funds that are managed with an ESG focus, according to Morningstar. In India though, the concept is as yet nascent. As the data available on ESG firms is limited, fund houses have devised their own methodologies to screen for ESG and procure data. The challenge is that only the top 100-150 companies by market capitalisation share a lot of data related to ESG.

Currently, given their investment mandate and limited investment universe, the ESG-compliant funds may be similar to existing ethical funds or those that follow Shariah principles to exclude sectors such as liquor and tobacco.

However, SEBI recently mandated that the top 1,000 listed companies prepare an annual business responsibility report (BRR) starting this year. A BRR has extensive disclosures about the adoption of responsible business practices by a listed company. This may eventually expand the investment universe for ESG funds.

The bottomline

You may invest in ESG funds for the ethics of it. For returns though, you’ll have to wait for a longer track record.

A weekly column that puts the fun into learning

Published on March 03, 2020

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.