By Dr Rashmi Soni and Hemanshi Kotai
In the dynamic environment of investments, there has emerged a new paradigm that is changing the silhouette of the financial world: the ESG fund, an emergent class of investments that directs funds toward companies firmly standing by the principles of environmental sustainability, social responsibility, and strong governance. Pre-eminent in India, ESG funds find their niches in the global movement of sustainable investments. Of the nine active ESG Funds in the Country, their Aggregate AUM now Stands at About ₹9,986 crore. These funds find refuge in companies that not only have a perfect record on the ESG front but also display the ability to be focused on growth, yet sustainable. Notable ones include Mirae Asset Nifty 100 ESG Sector Leaders ETF, Quantum India ESG Equity Fund, Invesco India ESG Equity Fund, and Axis ESG Equity Fund. The Mirae Asset Mutual Fund has an overall ESG score of 67, setting a benchmark among peers.
In contrast, non-ESG funds in India cast a wider net, investing across companies regardless of their ESG practices. Their investment decisions are largely driven by traditional financial metrics, thus making them more conventional for investors.
Looking at ESG fund performance, one would find that they have been quite resilient, especially during periods of slowdown in economies. These funds have thereby returned quite competitive long-term performance and proved to be a distinct channel of investment. That could be explained because companies possessing leading ESG practices are usually better positioned to withstand any foremost set of challenges and pursue growth opportunities.
While ESG funds represent a fast-growing space, the Indian market is still fledgling. Such funds are more likely to increase as the awareness trend towards sustainability and business ethics sharpens further amongst investors in the near future.
Such funds represent an emerging new avatar of new-generation investments in which financial goals amalgamate with values of ethics and the environment. These shall be big forces as the contours of the investment landscape unfold ahead in India. The choice between ESG and non-ESG funds basically boils down to traditional financial metrics versus the long-term societal and environmental impact of business operations. Indeed, it will be interesting to watch this dichotomy as the scales are beginning to tilt toward sustainability. This is not a flash in the pan in terms of changed investment behaviour. It is going rapidly, illustrated by KPMG reports that indicate a global sea change in ESG reporting. The trend brings out the promise of ESG funds to be the future of investing in business practices for sustainability and positive social change.
Investor reaction to ESG funds has been stylized across India. Although there was a rush towards ESG mutual funds initially when the trend set in during 2020, more recent trends are showing declining interest. While the regulatory push and increasing awareness about the green economy are in place, the focused ESG fund has been witnessing continuous outflows with a net outflow of ₹891.53 crore in the calendar year 2023 alone. The general reasons for this fall can be attributed to a global rally in defense stocks and renewed interest in fossil fuel companies that are normally excluded in ESG portfolios. A good number of Indian investors, however, still believe in ESG investments. In a survey by the CFA Institute, 60% of the respondents in India cited higher risk-adjusted returns as the key reason for investing in ESG funds, against 29% globally. This indicates that the belief in Indian investors for ESG investing is very strong but based on its financial viability.
The performance across most ESG funds in India has been quite commendable. While absolutely at a nascent stage compared to global markets, ESG indices in India outperform traditional equity indices over the long term and show better protection against downside risks. This very performance brings out the potential of ESG funds in rendering sustainable returns with ethics and environmental values.
In other words, ESG funds are paving a new roadmap in the investment ecosystem, bridging close to finance objectives while committing to sustainability. With rising awareness among investors and a maturing regulatory schema, ESG funds promise to play a principled role in shaping the future of investments within India and beyond.
(Dr Rashmi Soni is the Professor of Finance at K J Somaiya Institute of Management and Ms Hemanshi Kotai is a Research & Teaching Associate at K J Somaiya Institute of Management)
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)
From: financialexpress
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