Environmental, social and governance funds, or ESG funds — which was once a buzzword among global investor fraternity — has failed to gain traction. The concept, which first came into domestic market in 2019, is still at a nascent stage.
There was big expectation then that these schemes will sell like a hot cakes. However, quite surprisingly, investors remained hesitant while fund houses preferred to be cagey on ESGs. In fact, Invesco Asset Management Company was the last to launch scheme based on ESG theme in 2021.
Currently, there are only nine India-based ESG schemes managing just around ₹11,000 crore of assets under management. These funds have largely invested in financial services, information technology and automobile/auto ancillary sectors.
In fact, the assets under management fell from around ₹10,750 crore to around ₹10,630 crore in the first six months of 2023 but in the second half due to a strong performance of banking sector, AUM recovered slightly.
The largest and the oldest among them is SBI Magnum Equity ESG. The scheme currently has an AUM of about ₹5,500 crore and gave an avergage return of 15.11 per cent in the last three years.
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Global phenomenon
The lack of interest towards ESG schemes is a global phenomenon. According to reports, the US witnessed record liquidations of ESG funds in 2023 that included BlackRock Inc.
A WSJ article labeled ESG as the latest dirty word in corporate America. Businesses are making a conscious effort to avoid using the acronym ESG to highlight their environmental, social and governance initiatives, the report said adding that on earnings calls, many chief executives now employ new approaches.
In the UK, too, ESG funds registered a record outflow of over £1 billion in 2023, suggest media reports.
Governments and the regulators across the world are trying to make the concept popular.
In March last, the Securities and Exchange Board of India introduced regulatory requirements pertaining to ESG disclosures, ratings, and investments. Among them, the most important proposal was ESG schemes have to give at least 65 per cent of their assets to publicly traded companies that carry out “Business Responsibility and Sustainability Reporting” (BRSR) Core 10 audits.
Besides, SEBI also allowed MFs to introduce six new categories under the ESG themes — exclusion, integration, best-in-class & positive screening, impact investing, sustainable objectives, and transition or transition-related.
These measures will facilitate green financing with a thrust on enhanced disclosures and mitigation of greenwashing, the regulator said in a circular.
The concept is still unclear as both the corporates and fund houses are yet to have a clarity on the issue. The available pool of companies is also limited.
Besides, it is a challenging task for CEOs/CFOs to understand the potential hurdles from sustainability risks such as climate change, natural resource depletion and supply chain impacts and tackle them effectively.
Unless awareness reaches ground zero, the concept of ESG investment may take a long time to sprout.