22nd January 2022

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ESG funds

Although they are heavily invested in global investments, ESG funds, absorbing the environment, social responsibility and corporate governance in their investment process, are also seeing a growing interest in the Indian mutual fund industry.

  • While there are currently three systems in the ESG space managing nearly Rs 4,500 crore (two of which were launched in the past 15 months), at least five other fund houses have lined up their new programs.
  • ICICI Prudential Mutual Fund which launched its ESG fund on September 21, 2020 has already raised more than Rs 500 crore in its current NFO. We know that Kotak Mahindra AMC should be released soon with its ESG NFO fund and others to follow.

What is ESG?

  • ESG investing is used as a synonym for sustainable investing or socially responsible investing. It examines three key areas: the environment, social responsibility and corporate governance.
  • Therefore, when selecting a stock to invest in, the ESG fund first pre-selects companies that score high on these three parameters, then analyzes the fundamentals and financial factors in its investment decision process.
  • Therefore, the programs will focus on companies that adopt environmentally friendly practices, follow ethical business practices and are respectful of employees, among others.

Why is there so much focus on ESG now?

  • Fund companies say modern investors are re-evaluating traditional investment approaches and, when investing, they are looking at the impact this has on the planet as a whole.
  • This paradigm shift is forcing businesses, investment firms, and asset managers to realize that investors are no longer just about returns. As a result, asset managers quickly began to integrate ESG factors into investment practices.
  • Even on the performance front, fund managers argue that global non-ESG-compliant companies tend to underperform in the long run due to issues such as higher cost of capital, increased volatility due to litigation , labor strikes, accounting fraud and other aspects of governance irregularities.

What is the ESG size?

  • Globally, ESG is growing year by year. There are over 3,300 ESG funds around the world and their number has tripled over the past decade. The value of global assets that apply ESG to investment decisions now stands at $ 40.5 trillion.
  • In India, there are currently three systems: SBI Magnum Equity ESG (Rs 2,772 crore), Axis ESG (Rs 1,755 crore) and Quantum India ESG Equity (Rs 18 crore), following the ESG investment strategy in India.
  • While the ICICI Prudential program launched its NFO last week, Kotak Mahindra AMC is expected to launch its NFO soon and more are expected to follow.

What change can this bring?

  • As ESG funds gain momentum in India, fund managers say companies will be forced to follow better governance, ethical practices, respect for the environment and social responsibility.
  • Overall there has been a big change on this front as there are so many pension funds, sovereign wealth funds, etc. do not invest in companies considered polluting, they do not follow social responsibility or tobacco companies, experts believe this will force companies doing business more responsibly.
  • Industry insiders say that companies in the tobacco and coal sector, those that generate hazardous waste from their chemical plant and do not manage it properly, and sectors that consume a lot of water and do not follow best practices in water reuse, as well like companies that dump without treatment. Trash on the ground, water, or air will have a hard time putting funds into it.
  • Industry experts say that conflicts exist at various levels and that many investors around the world seeking to create lasting wealth do not want to be associated with such conflicts.
  • For example, while the global tobacco industry’s annual profits amount to $ 35 billion, it is also a cause of nearly 6 million deaths annually, and investors are increasingly sensitive to these realities.
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