ESG investing gains ground amid pandemic, better sustainability disclosures

At the end of June 2021, assets invested in Indian sustainable funds identified by Morningstar reached a record Rs 11,970 cr, significantly up from Rs 4,210 cr a year ago

ESG investing in India is likely to gather momentum egged on by the Covid-19 pandemic, global growth of such investments and improved sustainability disclosures in India, with the rollout of Business Responsibility & Sustainability Reporting (BRSR), which is applicable for the top-1,000 companies by market capitalisation effective FY2023.

Sustainable investing assets in five major global markets grew at a CAGR of 7.3 per cent to $35.3 trillion at the start of 2020 outpacing the CAGR of 3.5 per cent for professionally managed assets over the past two years, said a report by Kotak Institutional Equities. US and Europe together continued to represent more than 80 per cent of global SRI (sustainable and responsible investments) assets; while the proportion of SRI assets in Japan (8.1 per cent), Canada (6.9 per cent) and Australasia (2.6 per cent) remained relatively unchanged over the past two years.

“This testifies the rise in ESG consciousness among stakeholders, and the progression of ESG from a risk management tool to a sound investment strategy. We believe that ESG investing in India will pick up driven by the global growth in this sphere,” observed the report.

At the end of June 2021, assets invested in Indian sustainable funds identified by Morningstar reached a record Rs 11,970 crore, significantly up from Rs 4,210 crore at the same time a year ago. Flows in the first half of 2021 were lower at Rs 1,230 crore as compared with the second half of 2020, which witnessed a significant number of new sustainable fund launches and had flows of Rs 3,630 crore.

“The coronavirus pandemic has led to a marked increase in investor interest and fund launches for sustainable funds globally. While the Indian sustainable fund market is still nascent, we witnessed a similar trend, too. While the initial fund launches have attracted significant interest and flows, we are yet to witness continuing flows come through in sustainable funds post launch,” said Kaustubh Belapurkar, director, Manager Research, Morningstar India.

Currently there are eight actively managed environmental, social, and governance funds, one passive ESG exchange-traded fund/fund of fund, and two global sustainable feeder funds. Active funds account for 93.5 per cent of the overall sustainable fund assets under management.

A few ESG indices have also emerged in the country. NSE Indices launched the Nifty100 ESG Sector Leaders Index in 2017, which gives investors exposure to select large-cap companies in the Nifty 100 Index that have performed well on ESG risk management. The ESG index excludes companies engaged in tobacco, alcohol, weapons and gambling.

"The Nifty 100 ESG Index has beaten the Nifty 100 index over all periods analysed between April 1, 2011 and March 31, 2021. In various market phases, too, ESG has mostly performed better,” observed a recent note by Crisil, adding that the outperformance of such funds over general equity was with lower volatility over longer investment horizons.