One of the growing trends in investment funds is ESG investing. So what is ESG all about? ESG is an acronym for Environmental, Social, Governance and many asset management firms across the globe have in recent times launched ESG funds.
As the world battled the pandemic in 2020, ESG investing held its own globally, registering inflows worth over $168 billion in 2020, as against $63 billion in 2019, according to data from market and financial intelligence firm EPFR. In the context of rising environmental issues, extreme weather events and the pandemic, ESG funds seem to be growing in significance. On the global front, there are more than 3300 funds that are into ESG.
ESGs at nascent stage but growing
In the Indian context too, ESG funds are slowly gaining importance. There are eight ESG mutual funds that have been made available to retail investors and three new fund offers that are open for subscription. Two of the recent NFO launches are passively managed funds that have underlying foreign funds focused on ESG. The core characteristic of these funds is that they seek to invest in firms that have a focus on ESG issues. According to the Association of Mutual Funds in India (AMFI) data, the combined AUMs of the ESG funds in December 2020 was Rs 9516 crore. According to Acuité Ratings, seven per cent of domestic AUM is currently invested in ESG funds. The ratings and research firm expects this investment to grow to 30 per cent in the next ten years. In the first quarter of FY21, ESG funds in India accounted for 27 per cent of assets under management (AUM).
India has a lot going for making ESGs matter because of the country’s commitment to reach zero carbon emissions. In fact, India is one of the countries that are on their way to meet targets envisaged in the Paris convention. India hopes to lower carbon emissions by 33 to 35 per cent by 2030 from the 2005 levels. India has shed 24 per cent in the intensity of emissions already. Considering the country’s commitment, businesses too are turning more eco-conscious. The Dow Jones Sustainability Index, one of the leading benchmarks for sustainable business practices, has identified 12 Indian companies in its list.
Evolution of ESG standards
In fact, the first move towards pushing more listed companies toward environmental consciousness was made by the Securities and Exchange Board of India (SEBI) in 2012. The market regulator made it mandatory for the 100 top listed firms in terms of market cap to file a Business Responsibility Report (BRR). This move was aimed at making businesses adhere to national guidelines on social, environmental and economic responsibilities and they are given an ESG score. The BRR requirement was later extended to 500 of the top listed entities by market cap and then to 1000 for FY 2019-20.
The Nifty 100 ESG Index has been designed to show the performance of companies that are in the Nifty 100 index based on their ESG score. According to NSE data, the sectors with the highest weightage on the index of 90 constituents are financial services (30.1 pc), IT (21.76 pc) and consumer goods (13.50 pc). The Nifty 100 ESG index has grown at a CAGR of 10 per cent vis-a-vis 8.7 pc CAGR of Nifty 100, according to news reports.
The demographics of India also holds a lot of promise when it comes to ESG investing in India. A majority of investments in the ESG category constitute high net worth individuals (HNIs) and ultra HNIs. According to a Knight Frank report, India’s UHNI population is expected to grow 63 per cent by 2025 from the 6,884 UHNIs at present. The number of billionaires in the country will grow from the current 113 to 162 by 2025, the report adds.
Another section of the population that is expected to contribute to ESG investments is the millennials. Millennials make up for more than 45 per cent of India’s working-age population and account for 70 per cent of overall household incomes, according to a Morgan Stanley report. Millennials are known to be more conscious about the environment and have known to pick companies that adhere to ESG standards. This will also shape the future of ESG funds in the country.
India’s ESG funds are still at a nascent stage when compared to the global numbers. However, with a huge chunk of the millennial population, growing HNIs and government and corporate thrust towards environmental, social and good governance practices, ESG funds are likely to grow in numbers.