ESG or non-ESG funds: Which scheme to pick? | Simply Save

At end-March 2023, the Securities and Exchange Board of India (SEBI) released detailed guidelines on how companies should make disclosures on their performance on the Environmental, Social and Governance (ESG) front.

Additionally, SEBI also widened the window for retail investors to invest in ESG companies. It carved out a separate ESG category for Mutual Funds and allowed MFs to launch multiple ESG schemes that follow different ESG strategies.

Before we look into the crystal ball to learn how the future of ESG funds would be, let’s do a quick recap.

Back in 2020, when the Coronavirus pandemic spread across the globe, investors felt a growing need to invest in ‘responsible’ companies. As a result, from just two ESG-based funds in India at the beginning of 2020, the number grew to eight by the end of that year.

Post-pandemic, ESG issues have moved from the sidelines to the mainstream of the investment industry over the past two years.
With the pandemic waning, investors are back to focusing on funds that give high returns, ESG or non-ESG.

After six New Fund Offerings (NFOs) in 2020 and one in 2021, no new ESG fund has been launched in India since March 2021.

Can SEBI revive the fortunes of ESG funds?

In this podcast, Kaustubh Belapurkar, who is the Director – Manager of Research at Morningstar Investment Adviser India, will discuss how ESG investing differs from traditional approaches, what role does regulations play in shaping ESG investing practices and the potential benefits of integrating ESG factors into investment decision-making.

Morningstar India is an investment research platform. Its parent, US-based Morningstar Inc., owns Sustainalytics, an ESG research firm.

Here are the key points Belapurkar highlighted:
· ESG investing is interchangeably used with the overarching concept of sustainable investing.

· Sustainable investing became popular 15-20 years ago. Back then, it was values-based investing, more like an exclusionary screening.

· Sustainable investing has its roots in excluding tobacco, alcohol or gambling companies from your investment universe. This has evolved over time.

· There are varying elements of ESG risks, and if they are unaddressed, they could cause a significant financial impact to the company in terms of loss of business and brand value as well as regulatory actions and fines.

· The biggest market for ESG right now is Europe. From the wealth management perspective, sovereign wealth funds, institutional owners, pension funds and insurance companies are the first movers in this space.

· Global assets in ESG funds total about $2.5 trillion, and 84 percent of that is from the European investors, 11 odd percent from the US and the remaining from the rest of the world.

· From retail investors’ or participation from the funds’ perspective, India is still a drop in the ocean.

· Non-ESG fund managers in India have been acknowledging and integrating ESG factors and risks for evaluating the stocks that they want to include in their portfolios.

· First thing investors should ask themselves is what is the intended objective when they're thinking about a sustainable investing framework.

· Going ahead, more and more asset managers will use the ESG framework in conjunction with their financial assessment framework to evaluate a company or a sector.