All you need to know about ESG investments

The environmental, social & governance (ESG) theme is not new in India. In fact, SBI Magnum ESG Fund is the first ESG fund in India. This happened when SBI Mutual Fund converted its SBI Magnum Equity Fund into an ESG theme in 2018. Therefore, if you start tracking its inception from 1991, you would observe that it will be of SBI Magnum Equity Fund and not of SBI Magnum ESG Fund. Hence, do not fall prey to any such sales pitch. And as always, we believe that you should understand the concept thoroughly before investing your money. 

 
What is ESG? 

As we all know, ESG is an acronym for environmental, social & governance. Here, to comply with the theme, the company’s performance on environmental, social & governance parameters is considered. An important premise in this theme is that the companies that adhere to ESG principles carry the potential of delivering sustainable earnings growth in the future. Further, it also considers the company’s risk management, which means, how the company manages its own operations in order to minimise the negative impact of ESG risk factors. 
 
ESG and World 

ESG fundamentally focusses on risks that affect the environment, society, and investors. Though not in the short-term, these risks do have a long-term impact on business sustainability. 
 
 
Environmental: 

1. Climate change 
2. Pollution including waste management 
3. Renewable energy use 
 
Social: 

1. Employee health and safety 
2. Workplace diversity and inclusion 
3. Product safety and quality 
 
Governance: 

1. Protection of all shareholders 
2. Business ethics and prevention of corrupt practices 
3. Accountability of board of directors 
 
 

Performance 

Though ESG factors do have an impact on sustainability yet investors look at the performance of such investment avenues. In order to understand the same, let us compare Nifty 100 ESG Total Returns Index (TRI) with that of Nifty 100 TRI. 

The performance of Nifty 100 ESG is quite better than that of Nifty 100. This can also be seen in the above graph. In fact, even in March 2020, it performed better than Nifty 100 and even contributed to the market recovery and outperformed Nifty 100. Returns should not be the sole factor. Let us now look at the risk.  
 

For risk metrics, we calculated the maximum drawdown of Nifty 100 and Nifty 100 ESG. As can be seen from the above graph, most of the time, the maximum drawdown of Nifty 100 ESG is lower than Nifty 100. The average maximum drawdown of three-year rolling returns for Nifty 100 ESG stood at negative 20.81 per cent, while that of Nifty 100, it was negative at 24.09 per cent.

We have a host of ESG funds available while most of them are recently launched. Therefore, it becomes quite difficult to comment on the performance of the funds in the theme.