Investment

Two more ESG schemes hit the market; should you invest in ESG theme?

Mutual funds are busy launching ESG schemes these days. Two ESG new funds offers or NFOs are currently open for subscription: Mirae Asset ESG Sector Leaders ETF and Quant ESG Eqity Fund. ICICI Prudential Mutual Fund launched an ESG scheme in September. Axis Mutual Fund also started an ESG fund earlier this year. According to mutual fund distributors more ESG schemes are likely the coming months. According to them, Kotak Mutual Fund is likely to launch an ESG scheme in the coming weeks.

For the new comers, ESG (short for environmental, social and governance) investing is also known as sustainable investing. ESG schemes invest in companies that score high on environmental and social responsibility, and corporate governance. So, ESG funds focus on companies with environment-friendly practices, ethical business practices and a good image. Fund houses have done studies to that shows that investing in ESG-friendly companies is profitable.

ESG theme is very popular in the developed countries. However, the theme is yet to catch the attention of investors in India. There are four ESG schemes already available in India, apart from the two NFOs that are currently open for subscription. The newest entrant to the ESG space, ICICI Prudential ESG Fund, garnered around Rs 1,400 crore during the NFO period. Take a look at the existing ESG schemes and the assets managed by them to gauge their popularity:

Scheme name Launch date AUM
SBI Magnum Equity ESG 1 Jan 1991 2,773 crore
Axis ESG Equity Fund 12 Feb 2020 1,680 crore
Quantum India ESG Equity 12 July 2019 20 crore
ICICI Prudential ESG Fund 09 October 2020 1,415 crore

Source: Value Research

“Over the past decade, we are observing that the ESG Index and the world index in Developed Markets (DM) have been tracking one another after outperformance in the past. Alternatively, in the Emerging Markets (EM) landscape, the MSCI ESG EM index has outperformed the MSCI EM index by around 50%, says Sandeep Tandon, CIO, Quant Mutual Fund.

“Through a report from the World Economic Forum, we observe that India ranks on the lower end of the spectrum on the ESG scoreboard with a score of 4.51/10 and ranks at 108/150. Given the dynamic, there is tremendous potential in India and by identifying companies with a higher relative ESG score. With the implementation of the right strategies and identifying the companies with a robust framework that accounts for the nuances of E+S+G, we reckon that there is scope for alpha to be generated,” adds Sandeep Tandon.

Babu Krishnamoorthy, Chief Sherpa, FinSherpa Investment Services, based in Chennai, agrees that ESG has great scope in India in the coming decade, but he says retail investors shouldn’t jump the gun.

“ESG and sustainable investing are gaining ground in India, specifically in the Covid-induced panic. There is a shift towards companies that are following better practices, dealing with workers in a better manner etc. In the years to come, my sense is that the international money flowing to India will prefer ESG compliant companies more than the others. So, ESG is going to be benefitted by that. However, I believe that in some years, all the companies in the Nifty 100 index will be ESG compliant and then it might lose its charm,” says Krishnamoorthy.

He believes that investors who want to benefit from ESG funds can allocate a part of their large cap allocation to these schemes.

“Don’t abandon some other scheme to invest in ESG. We don’t know what kind of returns we can expect from these schemes in the years to come. However, these companies are big names and will be good companies. So, if you want to take advantage, choose a scheme and invest a part of your large cap money in one of these schemes. You won’t miss out on the returns generated by ESG funds if you have allocation to large cap funds, since the universe will be more or less the same. However, you might miss on the returns generated by some companies going from mid to large cap and do not make the cut for ESG. So, it is totally an investor to investor call,” says Krishnamoorthy.

Mirae Asset ESG Sector Leaders ETF closes for subscription on November 10, and Quant ESG Equity Fund closes for subscription on October 30.

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