The remarkable birth of ESG conscious Indian investors

Updated: Sep 30, 2021

Ever since the COVID-19 pandemic, ESG funds have been gathering steam and delivering big returns to environmentally conscious Indian investors. Now, they are looking at placing their bets on companies that have solid principles.

 

The COVID-19 pandemic has been coinciding with increasing investor gravitation towards alternative investments, and the spotlight is on a moral gatekeeper: Environmental, Social and corporate Governance (ESG) investing.


While ESG investing is still in its nascent stages, there is an increasing awareness among investors. And, this is leading to a whopping surge in assets under management (AUM) of ESG funds. According to Morningstar Inc, ESG AUMs soared 184 percent to 1,200 crore as of June, on an annual basis.


What are ESG funds?

ESG funds constitute the ones whose asset allocation mostly include shares and bonds of companies that are examined and scored based on environmental, social and governance factors.


Illustration by Pratyush Thaker


The launch of ESG funds in India have contributed to a rise in awareness among domestic investors about eco-conscious investing across the globe.

"ESG is already playing a material role in the decision-making processes of governments, regulators, investors, lenders and corporations. This will not only transform the investment management industry, but also redefine corporate India’s approach to risk management for sustainable value creation," Ashu Suyash, MD & CEO, CRISIL, said during a press conference.

How do you invest in ESG funds?

Presently, India has around 10 funds that adhere to ESG principles, the oldest one being SBI Magnum Equity ESG. Each fund varies from the other, some have allowance for global stocks, while others are passive.


Representational image (Image credit: China Banking News)


SBI Magnum Equity invests at least 80 percent in stocks falling under the ESG criteria and up to 20 percent in other equities and/or debt and money market instruments, according to Morningstar.


If you are looking for more options to invest in ESG funds, you can go for Axis ESG Equity Fund, Quantum India ESG Equity Fund, ICICI Prudential ESG Fund, Mirae Asset ESG Sector Leaders ETF and Aditya Birla Sun Life ESG Fund.

Higher returns than conventional funds

The rise of ESG funds' was boosted by its relatively strong performance during the pandemic. Its growth was noted faster in the second half of 2020 when compared to the first half of 2021. Overall, the annual growth rate of Indian ESG assets is still huge. This is so because people have a host of financial products to choose from when it comes to impact investments. And presently, they are giving historically higher returns than their conventional counterparts.


A report by Edelweiss Securities points out that not only has the value of the AUMs soared, but so has the number of ESG funds in the country. “As per our research, there are ten domestic ESG funds in India with AUMs of Rs 11,800 crore as on June 2021. Out of these, eight were launched last year," the brokerage firm said.


CRISIL’s survey shows that 80 percent of issuers and institutional investors intend to integrate ESG in their strategy.

"Our ESG research, data, insights, assessments and solutions will empower customers and stakeholders to make decisions with conviction, and contribute to sustainable progress around the world.” added Suyash.

Richard Rekhy, former chief executive officer of KPMG India isn't one to mince words when it comes to ESG. "ESG now is no longer a fad, and definitely here to stay," he told Forbes in an interview.


"It will disrupt business models...climate change is a physical shock. The recent calamities have fast-paced the trust stakeholders have on ESG. Whether it is the government, investors, employees, vendors, contractors, suppliers or the community at large, they will hold the corporations more responsible on ESG parameters going forward," he added.


India still lagging, no official standards yet


In comparison with other countries, India is still lagging behind. The United States has over 500 ESG funds according to Refinitiv data, China and Japan have 119 and 182 respectively as stated in the Reuters report.


Number of ESG funds in major countries in the world (Image credit: Reuters / Refinitive Eikon)


So, why the reluctance? This can be attributed to the fact that most funds in the sector are new and do not have a long track record of outperformance.


The country’s market regulators now require companies to disclose their ESG policies, but compliance and reporting of these practices are still evolving. Regulatory bodies have not churned out official standards on what constitutes ESG yet.


Parameters to define an ESG score of a company varies depending on the company that is offering the score. For example, Edelweiss Securities that released its scorecard of top 100 listed Indian companies, judged on 40 metrics with equal weights to the E, S and G, based on data available in the public domain.


When CRISIL came up with its scorecard for 225 companies in June, it tracked 100 parameters and had different weightages for E, S and G based on company performance and the relative performance of the sector it belongs to.


Having scaled an all-time high thus far in this year, the ESG-focused green bonds market is on course to cross the $ 10 billion mark by the end of 2021, according to investment banking major JP Morgan. ESG investing in India while still gaining momentum among domestic investors, is currently more focussed on global pools of capital.


With the country's biggest business groups such as Mahindra, Reliance and Birla leading the ESG way, the sector is predicted to garner more support from domestic investors in the coming years and also change the belief system among businesses.


 

Edited by Roshni Shroff

Cover image illustration by Pratyush Thaker

 

Some video resources to help you learn more on ESG investing -