Has time come for ESG investing in India?

Recently, one of the biggest fund houses in India launched an ESG fund. ESG stands for environmental, social & governance.  This will be the fourth ESG-dedicated mutual fund in India. ESG investing means deciding on companies for portfolio not only on the basis of usual financials but also, factoring in ESG parameters. Globally also, we are witnessing good demand for such a fund.

Year to date, almost USD 19 billion of funds have flown into funds dedicated to ESG, which is almost double of what we have observed last year during the same period. One of the major reasons for such a huge inflow in the time pandemic is the performance of such funds. In a year's timeframe, they have outperformed S&P 500 by 200 basis points. Globally, as of December 2019, there were 3,308 funds, which were into ESG investing. This number was 1,168 a decade back. This clearly shows how the acceptance of the funds has panned out in the developed markets. Research over the past several years across developed markets has increasingly indicated that this investing method can reduce portfolio risk and generate better investment returns. Besides, investors also feel good as they believe that they are doing a responsible investment and are a part-owner of a company, which is positive to the environment and people around at large.

Should you invest in an ESG fund?

In India, it is still at a budding stage and there are only three funds now, which together have Rs 4,500 crore of AUM, which is less than one per cent of the total equity dedicated mutual fund. The performance of these funds is lagging to a large-cap index such as Nifty 50.

Performance of ESG Funds vs Nifty

So, if you think that you are a socially responsible investor and wish to align your values with the investments made, even if it means slightly lower returns initially, you can go for an ESG fund.