MF Update: Environmental, Social and Governance Funds
Asset managers around the world keep on looking for themes that can generate better returns. One such theme, that is prevalent in the western world and is now catching up in India, are funds based on ‘ESG (Environmental, Social and Good Corporate Governance) Framework’. They are also known as socially-responsible investment.
ESG investing involves screening companies based on consideration for environmental, social and governance factors. The financial factors are not the only criteria for selecting stocks and they just add up to the entire analysis. ESG factors are industry-specific as different industries may face different key ESG risks and opportunities. The funds based on this theme invest in a diversified basket of companies following ESG criteria. They believe that what is good for the society can also be good for your portfolio. They exclude companies engaged in the business of tobacco, alcohol, controversial weapons and gambling operations.
In India, there are hardly a couple of funds investing with these themes. According to a McKinsey report, ESG assets totalled USD 22 trillion across Asia, Australia, New Zealand, Canada, Europe and the US at the start of 2016. There are 187 US-listed open-end funds and ETFs in this space, with total assets of USD 75 billion.
This investing style though started in the 1960s, does not have many funds with a long history. Nevertheless, various studies show that funds that are investing in ESG framework have lower volatility in their performance and in many cases, they have outperformed the funds that have not tied ESG factors to their portfolio construction.
To gauge the performance of the ESG theme, we studied the performance of S&P BSE 100 ESG Index against the BSE Sensex. The BSE 100 ESG index came into existence in the month of October 2017. This index has risen by 4 per cent since then. Sensex in the same period has increased by 6.6 per cent. However, nine months is a too small period to pass any judgement on its performance.