ESG funds: Lower-income groups more inclined to invest, says McKinsey report

ESG funds, a nascent asset class in India, is becoming popular with investors in the age group 21-34 years, global consultancy major McKinsey & Company said in a survey report.

ESG funds are a nascent category of mutual funds in India though it is popular in the developed economies like the US.

No divide

In their survey McKinsey found that there was virtually no difference among the investors in metro and non-metro cities in so far as investing in ESG funds are concerned. While 48% of those investing in ESG funds come from metro cities, 52% live in non-metro areas.

In fact, there was a concentration of investors in ESG funds sampled in the survey among the lower income brackets. “Lower income groups more akin to investing in thematic as pre-designed baskets following a trend,” observed the report.

Lower-income brackets

More than 26% of ESG investors are in the lowest annual income bracket of up to Rs 5 lakh, while more than 33% are in the Rs 5 lakh and Rs 10 lakh bracket. Only 15% of the investors were in the Rs 10-25 lakh income group while 12% fell in the Rs 25-50 lakh bracket. Just about 4% of the respondents had incomes more than Rs 50 lakh a year.

“In the past two months HSBC and BNP Paribas have launched two funds on climate change, carbon footprint management and natural resources conservation and sustenance. The HSBC fund was mor board based and focussed on climate change while the one from BNP Paribas was more narrowly focussed and concentrated on water, which we all know is the most scarce resource today. While there is an institutional push, there is a simultaneous rise in demand from the retail investors,” said Nilanjan Dey, director, Wishlist Capital.

“I don’t fully agree with the McKinsey view that the lower income groups are more likely to invest in these funds. But I have seen those who have lived for a few years in the Western countries and were exposed to investment trends enquire about these funds. There is growth in this sector but the long term profitability of the sector might be debated,” said MF advisor Prasunjit Mukherjee, chief ideator, Plexus Management Services.

ESG stands for environment, social and governance. These funds invest in companies which are conscious about and follow environmental practices that are socially responsible and adhere to high standards of corporate governance. They deliberately do not invest in companies in the ‘vice industry’ such as alcohol and tobacco, deal in fossil fuels and weapons/armaments.

Nascent market

McKinsey pointed out that there were only four ESG funds in India till October 2020 was four while there were 3,475 such fund in the world with assets under management amounting to more than $1,200,000 million. The figure for Indian ESG funds stood only at $6,000 million.

Recently, at the Berkshire Hathaway shareholder meeting, Warren Buffet said they are heavily invested in ESG companies like some that dealt in renewable energy. In the past ethical concerns prompted the group to stay away from investing in tobacco firms.