ESG Funds

Why is this in news?

There are currently three ESG schemes managing close to Rs 4,500 crore (two of these launched in the last 15 months), while at least five more fund houses have lined up new schemes. ICICI Prudential Mutual Fund, which launched its ESG fund on September 21, has already raised over Rs 500 crore in its ongoing NFO. It is learnt that Kotak Mahindra AMC is set to come out with its ESG fund NFO soon and more will follow.

What is ESG?

ESG investing is used synonymously with sustainable investing or socially responsible investing. While selecting a stock for investment, the ESG fund shortlists companies that score high on environment, social responsibility and corporate governance, and then looks into financial factors. So, the schemes focuses on companies with environment-friendly practices, ethical business practices and an employee-friendly record.

Why so much focus on ESG now?

Fund houses say modern investors are re-evaluating traditional approaches, and look at the impact their investment has on the planet. As a result of this paradigm change, asset managers have started incorporating ESG factors into investment practices.

How big is ESG?

There are over 3,300 ESG funds globally and the number has tripled over the last decade.
The value of assets applying ESG to investment decisions today is $40.5 trillion.
In India, as of now, there are three schemes —
SBI Magnum Equity ESG (Rs 2,772 crore),
Axis ESG (Rs 1,755 crore) and
Quantum India ESG Equity (Rs 18 cr) — following the ESG investment strategy.
While ICICI Prudential’s scheme launched its NFO last week, Kotak Mahindra AMC is expected to launch its NFO soon and more are expected to follow.

What change can it bring?

As ESG funds gain momentum in India, fund managers say companies will be forced to follow better governance, ethical practices, environment-friendly measures and social responsibility.
Globally there has been a big shift as many pension funds, sovereign wealth funds, etc don’t invest in companies that are seen as polluting, don’t follow social responsibility, or are tobacco companies.
In the coming years, companies that do not follow sustainable business models will find it tough to raise both equity and debt.

Which sectors/companies will lose out?

Industry insiders say tobacco companies and companies in the coal business may find it tough to make the cut; so will companies that generate hazardous waste and do not manage them properly.
Besides, sectors that use a lot of water and do not follow best practices on its reuse, or companies that discharge untreated waste in soil, water or air will find it tough to get funds parked in them.
Experts in the industry say there are conflicts at various levels and many investors worldwide who are looking at sustainable wealth creation do not wish to be associated with such conflicts.
For example, while the global tobacco industry profits per year come to $35 billion, it is also a cause of nearly 6 million annual deaths and investors are growing sensitive to these realities.