ESG Funds in India
Updated: Oct 8, 2022
The momentum and discourse surrounding ESG (Environmental, Social, and Governance) investments have recently gained a lot of traction. More investors are putting money into firms that prioritize sustainable growth and dedicatedly follow ESG principles in an effort to become more socially and environmentally responsible. According to Morningstar data, the AUM (assets under management) of ESG funds in India have been rapidly increasing. Their AUM was Rs. 2,268 crores in 2019. They have risen to Rs. 12,447 crores as of March of this year.
Furthermore, a recent study conducted by the Audencia Business School, Auckland University of Technology, and the University of Adelaide have revealed that there is a higher investment in sustainable, environmentally friendly assets like ESG funds when people are feeling pessimistic.
According to investment advisor, Shriram Sharma, “ESG investing has grown in popularity in recent years and referred to in many different ways, like sustainable investing, socially responsible investing, and impact investing. ESG practices include strategies that select companies that support their stated commitment to one or more ESG factors. For example, companies with policies aimed toward reducing their environmental impact or focusing on transparency and governance principles.”
In addition, he says that ESG practices may include screening out companies if they showcase poor performance in terms of managing and mitigating ESG risks and opportunities. Beneficient practices can help reduce a company’s carbon footprint and help increase energy efficiency, the protection of biodiversity, and conservation. Human rights, gender diversity, equal opportunity, and safety are all included as part of the social criterion. Business ethics, whistleblower programs, board diversity, CEO salary, and tax management are all governance considerations.
However, one persistent complaint about ESG funds is a lack of clarity and openness in their reporting and appraisal of elements that determine whether a firm is socially and environmentally responsible or not. This makes it incredibly difficult for regular investors to make well-informed investment decisions in this field.
According to veteran financial advisor Sanjeev Dawar, it can be helpful to select large-cap firms whose vision and goals align with these principles rather than making a judgment on your own. It is easier to invest in an ESG fund where investment automatically gets disclosed to a number of companies who have faith in this theme.
ESG funds have better performance ratios than non-ESG funds over a period of 5 to 10 years. However, many ESG funds showcase sectoral bias and are heavily concentrated in technology firms and financial companies.
While investing in ESG funds can be a viable option, it is important to wait as this segment is still developing in India.