Fund houses line up to take ESG route amid a spate of governance issues

The environment, social and governance (ESG) theme is catching on among mutual funds amid a spate of corporate governance issues coming to the fore and the growing focus on climate change and sustainability.

BNP Paribas has filed an offer document for its BNP Paribas India ESG Fund with the market regulator. Quantum Mutual Fund will hit the market with its Quantum India ESG Equity Fund on June 21. Last year, SBI MF had converted one of its schemes SBI Magnum Equity into an ESG fund. SBI Magnum Equity ESG Fund currently manages Rs 2,391 crore.

The schemes primarily aim to invest in securities that favour the ESG criteria, and avoid names that go against it. For instance, BNP Paribas India ESG Fund will avoid investments in companies in breach of the United Nations Global Compact Principles or sectors connected with tobacco, synthetic crude oil from tar sands, coal, controversial weapons or asbestos, as well as alcohol and gambling.

“Globally, institutional investors such as pension funds give a lot of importance to ESG parameters for making investments. Awareness of governance and environmental issues is picking up in India, too,” said Jimmy Patel, managing director and chief executive, Quantum Mutual Fund.

ESG investing contributes over $20 trillion, or a quarter of the assets managed worldwide. Though the market in India at a nascent stage, the potential is huge, believe experts. With 18 per cent of the world’s population, the country is one of the most important geographies for the achievement of the United Nations Sustainable Development Goals. India is also the third largest producer of greenhouse gases.

“ESG factors will gain prominence with Indian investors over time, probably sooner than later. Just like in the US and Europe, the acceptance of these factors will necessarily have to be driven by large institutional investors such as the EPFO,” said Dhaval Kapadia, director-portfolio specialist at Morningstar India.

The need for improved ESG standards is being endorsed by regulators, too. For instance, the Securities and Exchange Board of India (Sebi) wants the top 500-listed companies to publish annual business responsibility reports. The Insolvency and Bankruptcy Code (IBC) was put in place in 2016 to protect the rights of creditors and improve the ease of doing business.

According to a recent research report by Kotak Institutional Equities, Indian stocks trade at large discounts to their fair values largely due to the market’s concerns over unsustainable high levels of debt, future of businesses in ‘low’ ESG industries facing potential disruption and weak corporate governance practices.