The United Nations in 2015 had set 17 Sustainable Development Goals deepening the need to focus on sustainability across industries and governance. The financial segment is no exception in the transition of adopting a more sustainable approach in investment. Environment, Social and Governance (ESG) schemes are gaining traction in India with close to INR 5,900 crores under three schemes with five more similar schemes in the pipeline. Popular in most developed countries, investing is ESG Funds are considered to be ‘sustainable’ investing and are basically schemes that invest in companies that rank high on environment-friendly, ethical and good governance practices. Globally, the total ESG investment has exceeded $1 trillion in assets.
The change in investment practice is very new after the fund managers realized investors are re-evaluating the traditional portfolio returns. The ongoing discussions on climate change, gender equality at work, the impact of business on the environment, employee welfare, etc are pushing managers to incorporate a basic index to assess the ‘sustainability’ criteria of the business. Shifting to ESG Schemes and Mutual Funds appears as the ‘new normal’ as a trend observed in the developed countries with pre-existing ESG Schemes, companies with good ESG scores are a viable option to invest as it tends to reduce environmental and social risks and inclines to have sturdier returns and cash flows, and lesser borrowing costs.
As opposed to the general belief that ESG investments would pay low returns, recent studies have pointed that returns on green assets have outperformed the traditional portfolio. The returns on NIFTY 100 ESG index is 10.6 % versus 9.1 % from NIFTY 100 index. ESG compliant business houses have the advantage to attract more investors in the near future. Many experts believe ESG investments also provide resilience and a well-diversified package for investors that focuses on risk and return. Under the NIFTY 100 ESG index, Infosys Ltd. tops the constituents by weightage with 11.23%, followed by RIL at 10.20% and HDFC Bank Ltd at 10.00% respectively. Recently launched ESG funds include Axis ESG equity, ICICI prudential and Mirae Asset ESG- has returns of 10.8 % CAGR outpacing NIFTY50 of 8.99%.
While a sustainable investment model is the future of investment, there is still inconsistency in methodology with no uniform standards of measurement. There is a potential possibility of labelling with an ESG tag but not being able to commit to sustainable practice. The trending investment option requires an individual investor to spend extra time to research and invest to actually make the risk worth it.
|Scheme Name||Market Value (in INR)|
|SBI Magnum Equity ESG||2773 crores|
|Axis ESG Equity Fund||1680 crores|
|Quantum India ESG Equity||20 crores|
|ICICI Prudential ESG Fund||1415 crores|
Inputs given by Zarieus Namirian