​ESG Funds Investment for a Sustainable Future

Every day you hear or read news about global warming, deforestation, etc. and probably wish for more responsible governance to tackle such environmental challenges. You might also wish to do something yourself to limit the impact. Here’s your chance - invest in socially responsible companies via environment, social and governance (ESG) funds.

What is ESG?

ESG funds filter companies not only on conventional criteria such as business and economic fundamentals, but adopt a more holistic assessment method.​ Practitioners of this philosophy of investing argue that companies that integrate ESG principles into their business are more likely to manage risks better, resulting in lower long-term operating costs, enhancement of company reputation and goodwill, and superior value creation for all stakeholders.

ESG unfolded

ESG investing Around the Globe

ESG investing is a popular concept globally, especially in Europe and the US.​ According to a report , sustainable investing assets in Europe, the US, Japan, Canada, Australia, and New Zealand amounted to $30.7 trillion at the beginning of 2018.

Global sustainable investing assets

Source: Global Sustainable Investment Alliance (GSIA): 2018 Sustainable Investment Review

Sustainable Investment in India

Though sustainable investing is still in its infancy in India, the nation’s footprint is slowly but surely expanding on the global map. According to data , funds that use a sustainable and responsible investing theme in India managed assets worth ~$30 billion in 2017, compared with $13 billion five years ago, with global funds occupying the lion’s share of this corpus.

Performance

It is a fallacy to think that ethical firms sacrifice financial performance at the cost of compliance. Empirical evidence suggests that such companies have outperformed the broad market indices over the long term.

Past performance may or may not be sustained in future.

Source: NSE

The Nifty 100 ESG Index is designed to reflect the performance of companies within the Nifty 100 index, based on ESG scores. The weight of each constituent in the index is tilted based on ESG score assigned to the company, i.e. the constituent weight is derived from its free float market capitalisation and ESG score.

Nifty 100 ESG has the inception date of April 1, 2011 with base value of 1000. Nifty 50 has been rebased to 1000 as on April 1, 2011 for analysis. The above data is the average of rolling returns of 3 years, 5 years and 7 years as on June 30, 2019.

Past performance may or may not be sustained in future.

Since the ESG concept is fairly new in India and awareness is low, very few fund houses have incorporated such funds in their portfolio. Rising popularity and easing scepticism about the ESG strategy will bring about standardisation of reporting ESG-related activities (currently mandatory for top 500 listed companies), thereby easing the challenges of making an objective assessment of such firms.

ESG provides investors an opportunity to not only reap financial benefits, but also sow a seed for socially-responsible activities. Using one’s funds to make the world a better place, beyond selfish aspirations, is a notion that captures the essence of sustainable investing. Investors should, however, do due diligence on the chosen fund and map it to their risk-return profile and investment objectives. Investors shall always refer to the Scheme Information Document and Key Information Memorandum of the schemes carefully to understand the detailed risk factors associated with the scheme. They can also seek the help of a financial advisor.

Disclaimer:

Any comparison mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully