ESG funds down but not out

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It seems that the increased investor interest in environmental, social, and governance (ESG) issues and sustainable funds have notched down in terms of flows, assets, and product launches.

As per Morningstar India in its research report on ‘ESG Investing Landscape of Indian Fund Investors,’ the estimated flows in second-quarter 2021 were significantly lower at Rs 26 crore, as compared with massive flows witnessed in the previous two-quarters Rs 1,200 crores in first-quarter 2021 and Rs 3,750 crore in fourth quarter 2020.

Key takeaways for the investors

As per the research, the first half of 2021 was a dampener for the ESG funds as only three sustainable funds were launched. Last year it was a different scenario, as the pandemic had picked investor interest and fund launches for sustainable funds globally.

When it comes to India, the sustainable fund market is still in its nascency, and that trend was reflected this year. Further, the report noted that the quarter flows in sustainable funds witnessed a mixed bag this year.

Although subscriptions have largely driven flow into new fund offerings (NFOs), it was the incremental flows into existing funds that have been muted. This led to the lack of a discernable trend on a quarterly basis.

“We identified six funds that were launched in the year to 31 Dec 2020, with as many as five launches in the last quarter of 2020. The first half of 2021 witnessed three sustainable fund launches, including two feeders into global sustainable funds. Indian investors currently have access to 11 India domiciled sustainable funds: eight active, one passive (ETF and fund of fund), and two feeders into global sustainable funds,” said Kaustubh Belapurkar, CFA, Director, Manager Research, Morningstar India.

What is ESG investing?

ESG (Environment, Social, Governance) or Sustainability Funds includes companies that incorporate environmental, social, and corporate governance (ESG) criteria throughout the investment process.

What are the features of this fund?

· This fund includes companies that are pioneers in adhering to ESG standards and have the lowest ESG risk.

· ESG Portfolio mostly includes large and mid-cap companies as Business Responsibility Reporting is only mandatory for 1000 companies by market capitalization in India.

· Stock selection is backed by strong ESG research.

EndNote

The sustainable fund market in India is concentrated with the top five funds that account for 86.5% of the overall sustainable fund assets, SBI Magnum Equity ESG being the largest with a fund size of Rs 3,920 crore as of June 2021.

However, on the positive side, when compared for the month ended June 30, 2021, the Indian sustainable funds rose 184% against June 30, 2020 year-on-year (y-o-y), which highlights the first half of 2021 saw impressive growth in assets invested in sustainable products from India domiciled fund managers. The returns are still going strong as per the value research data ESG funds have given returns of 48.07% and 14.59% over 1 and 3 years.