Advocates of environment, social, and governance (ESG) investing have long focussed on how companies make money, rather than how much money they make. This trend picked up pace when the bulls were ruling the markets, and as a result, the mutual fund industry witnessed a slew of ESG fund launches.

For instance, 8 out of 10 existing ESG funds were launched between 2020 and 2021, with a promise that a portfolio guided by ESG factors and financial considerations can usher in a new wave of sustainable investing.

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As investments in India’s ESG stocks from ESG funds touch nearly ₹10,000 crore, we take a look at what stocks, sectors found place in ESG fund portfolios and the returns for investors.

Niche category

ESG investing is a niche segment and not all the fund houses have launched this offering as the companies are expected to meet various norms related to governance, environmental and social aspects.

Initially, it was challenging to implement such frameworks in India due non-availability of data related to performance of the companies on ESG parameters.

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Today, the ESG data of top 100 companies are available, and this universe is now being slowly extended to top 500 companies.

Out of the 10 ESG fund offerings that are in existence, majority of the funds are actively-managed portfolios, while two funds are passively-managed (Mirae Asset Nifty 100 ESG Sector Leaders ETF and a related FoF).

SBI Magnum Equity ESG Fund is the biggest fund (with over 40 per cent of category AUM), followed by Axis ESG Equity Fund, ICICI Prudential ESG Fund and Kotak ESG Opportunities Fund. As majority of ESG funds are only 2-3 years old, the track record is limited.

Portfolio scan

A close look at the latest portfolios of ESG funds throws up interesting insights.

One, there are broadly 214 securities in ESG fund portfolios, including 36 international stocks (Microsoft, Lululemon Athletica, Alphabet, Workday and Texas Instruments). In fact, some ESG funds are parking up to 30 per cent of their funds in global ESG oriented stocks.

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Since ESG schemes fall under the category of thematic funds, a minimum of 80 per cent of total assets are invested in securities aligned with the ESG theme. Note that some funds select stocks if they have ESG orientation “in the opinion of the fund manager”.

Two, if your expectations are centred around differentiated ESG fund portfolios vis-a-vis equity funds in the industry, you should lower your expectations.

In terms of invested value, the top-10 holdings across ESG funds are Infosys, ICICI Bank, TCS, HDFC, HDFC Bank, Axis Bank, SBI, L&T, Ultratech Cement and Kotak Mahindra Bank, per ACEMF database. This is broadly the same with the top-10 holdings of overall equity fund industry, with only the weights being different. In case of the overall equity fund investment universe, Reliance Industries, Bharti Airtel and ITC figure in top-10.

Three, BFSI and IT stocks are the major attractions for the ESG funds. This trend is not much different from the overall equity fund industry, where banks and finance account for over 30 per cent of allocations, while the IT sector accounts for about 7 per cent. In other words, the returns for investors in ESG funds will not be different from that of regular equity funds.

Tracking returns

The individual one-year fund returns (up to April 20, 2023) range from -6 per cent to +4 per cent, bringing the category average to a forgettable -0.98 per cent amid falling markets (-3 per cent for BSE 100). The paltry 1-year returns place the ESG thematic category among the 4th worst out of the 20 broad buckets tracked by the industry.

Three funds have clocked 3-year individual returns between +17 per cent to + 25 per cent (CAGR), compared to BSE 100’s 25.5 per cent return in the same period. The Nifty 100 ESG index has clocked 23.4 per cent in the same period. The three-year period has been good for markets, with top equity categories clocking in excess of 30 per cent CAGR returns. This is why even in 3-year category return parameter ESG funds figure near the bottom of the pack. The lone actively-managed ESG fund with 5- and 10-year NAV history failed to beat its benchmark.

Some may argue that investors need to give some more time for ESG funds to deliver as the segment is still in a nascent stage, while others may argue that sustainable investing is not for returns, but for the satisfaction of backing good businesses for the good of society and the world at large.