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ESG investment – List of 10 Best ESG Funds in India

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ESG investment - List of 10 Best ESG Funds in India
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ESG and ESG Funds – The Latest Trend in Investing. Latest top ESG funds by performance in India

ESG investment is the latest investing methodology investors are betting on these days. ESG full form is Environmental Social and Governance. Although ESG investing has become a topic for discussion now, you will be surprised to know that its principles aren’t new. And these are not even difficult to understand.

In this article, you will understand more about ESG investing, how investments work, what led to E.S.G investing in India and globally, how you can build an E.S.G-compliant portfolio, and a list of the latest top-performing E.S.G funds in India.

What is ESG Investing and its history?

E.S.G Investing and E.S.G Funds are a way to invest “sustainably” – where investments are made considering their impact on the environment, human well-being, and the economy.

Hundreds of years ago, religious and ethical beliefs influenced investment decisions. For instance, Muslims established investments that complied with the Sharia law, which prohibits investing in businesses that deal with weapons, lending etc.

The rising importance of corporate social responsibility (CSR) and social sustainability has increased investor awareness about ethical participation in the market. In 2006, the United Nations released a set of guidelines called Principles of Responsible Investments (PRI) for incorporating E.S.G factors into business policy and strategy.

Many investors believe PRI may have marked the entry of ESG into mainstream investing today. PRI has over 2000 signatories and is widely considered the official point of reference for all things ESG.

What are The ESG Investment Component?

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What Are ESG Funds?

ESG funds are those funds whose asset allocation mostly includes shcompanies’ ares and/or bonds ofat are evaluated based on Environmental, Social and Governance factors.

While Europe accounts for half of the global E.S.G assets, the U.S. has the most robust expansion this year and may hold the center stage in the category starting in 2022. However, the next wave of growth could come from Asia with a significant focus on Japan.

The boom in ESG Investing and ESG Funds

Recent times have seen a remarkable expansion of ESG investing and ESG Funds in India as and Global economies. ThIn addition, the COVID-19 pandemic brought more attention to the interdependencies between social, environmental, and economic factors for the growth of a business.

When coronavirus first appeared in late 2019, market disruptions and uncertainties caused many investors to turn to E.S.G funds. In the first three months of 2020, investors globally invested $54.6 Billion in ESG funds. Between 2020 and 2021, the investments in global E.S.G funds more than doubled.

According to ADEC Innovations, $30.7 trillion (more than Rs. 24 thousand crores) currently sit in sustainable investment funds worldwide, and it is expected to grow to ~$50 trillion in the next two decades.

While Environmental Social and Governance investing entered the corporate boardrooms globally in 2004, there is no specific date that marks the beginning of E.S.G investing in India. Scores of developments and policy reforms took place over the last decade to guide ESG investing in India.

Mutual fund houses have launched Environmental Social and Governance funds in India. Among the popular ESG funds, SBI Magnum Equity E.S.G Fund, with an asset under management (AUM) of Rs. 4,509 crore i,s the oldest ESG fund in India.

Significant Developments that Built the Foundation of ESG Investing in India

2008 – CRISIL, Standard and Poor, KLD Research & Analytics launched the S&P E.S.G India Index. It was the first investible index of Indian enterprises whose business strategies and performance demonstrate a high commitment to meeting E.S.G standards.

2009 – The Ministry of Corporate Affairs (MCA) issued Corporate Social Guidelines. It recommended all businesses must develop CSR policies centered around six core elements – care for stakeholders, proper functioning, respect for workers’ rights and welfare, respect for human rights, respect for the environment, and activities for social and inclusive development.

2012 – The Securities Exchange Board of India (SEBI) issued a circular mandating the almost significant00 listed companies to publish an annual business responsibility report.

2014 – The government passed a landmark law mandating companies of a particular scale and profitability to spend 2% of their average profits of preceding years on CSR activities.

2015 – SEBI extended the 2% CSR requirement to the 500 companies in the SEBI Listing Obligations and Disclosure Requirements Regulations.

2016 – SEBI issued its green bond guidelines, making India the second country after China to provide national-level guidelines.

Why Is ESG Investing an Evolving Concept in India?

E.S.G investing is commonplace around the world. But it is still an evolving concept in India. Despite its decade-old history, the country is yet to show significant growth in E.S.G investing.

Today, around 88% of Indian public corporates have implemented E.S.G initiatives. However, E.S.G teams and employees lack confidence that their companies can deliver against their promised goals. Only 50% believe their firm performs very effectively against environmental metrics. 39% feel the same way about governance. And only 37% are satisfied with social progress.

Despite this, Inflows in E.S.G funds in India leapfrogged close to 95% to Rs. 4,844 crores in FY21 from Rs. 2,490 crores in FY20. However, these funds recorded a net outflow of Rs. 315 crores in FY22.

India has fewer E.S.G funds focused on E.S.G investing than other top 10 economies. Interestingly, Taiwan has more funds focused on Environmental, Social and Governance metrics than India.

India has 10 E.S.G funds, whereas the U.S. and the U.K have over 500 E.S.G funds each.

The reason for such under-penetration is simple. Indian investors are still relatively new to sustainable or E.S.G investing. Hence, they are a little reluctant to put cash into ESG funds as most funds in the sector are unique and do not have a track record of outperformance. Moreover, some institutional investors and distribution partners often have policies that do not allow them to invest in ESG funds with less than three or five years in the market.

Comparison between Nifty 50, Nifty 100 and Nifty E.S.G 100

ESGChart

As you see, the thematic index NIFTY ESG 100 has outperformed both Nifty 100 and NIFTY 50 by 1.3% and 1.8%, respectively.

What is a Thematic Index?

An index that tracks performance of a list of companies on the stock market that follow a particular investment theme. Examples of other thematic index are Nifty50 Shariah Index, Nifty SME Emerge, Nifty Housing, Nifty India Defense etc. You can track these indices on Niftyindices.com.

2022 List of ESG Funds in India and their performance

ESG Fund Asset Under Management (Rs. Cr.) % 1 Year Returns % CAGR Till Date
Quant E.S.G Equity Fund 90 21.9 52.9
Quantum India E.S.G Equity Fund 61 -1 17.9
Axis E.S.G Equity Fund 1806 -9.3 16.9
Mirae Asset Nifty 100 ESG Sector Leaders Fund of Fund 136 -0.8 16.6
ICICI Prudential E.S.G Fund 1412 -6 15.1
Invesco India E.S.G Equity Fund 750 -2.7 14.3
Adity Birla Sun Life ESG Fund 1001 -5.1 12.5
SBI Magnum Equity ESG Fund 4509 1.6 12
Kotak ESG Opportunities Fund 1452 -6.7 8.8
HDFC Housing Opportunities 1209 3.5 5.9

Rise of ESG Around the World

In January 2004, former UN Secretary-General Kofi Annan invited 50+ CEOs of major financial institutions to take part in a joint initiative under the guidance of the UN Global Impact with the support of the International Finance Corporation (IFC) and the Swiss Government. That’s when Environmental Governance and Investing were first discussed.

The goal of that initiative was to facilitate the incorporation of E.S.G into capital markets. And a year later, the term E.S.G Investing was first used in a landmark report titled “Who Cares Wins“.

At the same time, United Nations Environment Programme (UNEP) produced the “Freshfield Report,” which portrayed E.S.G issues as unrelated to financial valuation. These two reports formed the base for introducing the Principles for Responsible Investment (PRI). Its role is to forward the integration of ESG investing into analysis and decision-making through thought leadership.

Today, many exchanges worldwide have made E.S.G disclosures mandatory for listed companies.

2013 – A Tipping Point for ESG investing

The growth of ESG investing has been everything but smooth and steady. On the contrary, it has had a fair share of struggles in the initial days. Institutional investors were initially reluctant to accept the concept, arguing that their primary duty was limited to maximizing shareholders’ values irrespective of environment, social impacts, and broader governance issues such as corruption.

Another excellent barrier has been a lack of data and the necessary tools to get complete information. However, corporate disclosure on E.S.G issues has routinely improved since the Global Reporting Initiative (GRI) launch in 2000.

Over 80% of the world’s largest corporations use GRI standards. The adaption of ESG investing and ESG funds picked up pace in 2013-14 when studies were published showing that good corporate sustainability performance is associated with good financial results. In addition, when coronavirus first appeared in late 2019, market disruptions and uncertainties caused many investors to turn to E.S.G funds.

Best 20 Largest ESG Funds by AUM

As of December 31 2020, the 20 Largest E.S.G funds held more than $150 Bn in assets combined. These 20 funds collectively represent ~13% of the total assets under management (AUM) globally in ESG equity funds.

Name AUM ($Bn) Inception Origin Country Fund Type
Parnassus Core Equity Fund 22.94 1992 U.S. Active Fund
iShares E.S.G Aware MSCI USA ETF 13.03 2016 U.S. Index-based ETF
Vanguard FTSE Social Index Fund 10.87 2000 U.S. Index-based Fund
Stewart Investors Asia Pacific Leaders Sustainability Fund 9.87 2003 U.K. Active Fund
Vontonobel Fund – mtx Sustainable Emerging Markets Leaders 9.58 2011 Luxembourg Active Fund
Northern Trust World Custom ESG Equity Index 8.69 2013 Ireland Index-based Fund
Pictet – Global Environmental Opportunities 8.31 2010 Luxembourg Active Fund
Pictet – Water 8.02 2000 Luxembourg Active Fund
KLP AksjeGlobal Indeks 7.69 2004 Norway Index-based Fund
Nordea 1 – Global Climate and Environment 7.37 2008 Luxembourg Active Fund
Parnassus Mid-Cap Fund 6.9 2005 U.S. Active Fund
iShares ESG Aware MSCI EM ETF 6.83 2016 U.S. Index-based ETFiShares Global Clean Energy UCITS ETF6.522007IrelandIndex-based ETFiShares Global Clean Energy ETF6.512008U.S. Index-based ETF
Nordea 1 – Emerging Stars Equity Fund 6.41 2011 Luxembourg Active Fund
TIAA-CREF Social Choice Equity Fund 6.32 1999 U.S. Index-based ETF
Handelsbanken Hallbar Energi 5.85 2014 Sweden Active Fund
Putnam Sustainable Leaders Fund 5.81 1990 U.S. Active Fund
iShares MSCI USA SRI UCITS ETF 5.63 2016 Ireland Index-based ETF
Calvert Equity Fund 5.37 1987 U.S. Active Fund
Top 20 Largest ESG Funds by AUM

Sector Exposure of Best 10 ESG Funds by AUM

Fund Communication services Consumer discretionary Consumer Staples Energy Financials Healthcare Industrials IT Materials Real Estate Utilities
Parnassus Core Equity Fund 11.32 7.88 8.52 0 6.17 10.61 18.17 32.48 3.38 1.47 0
iShares ESG Aware MSCI USA ETF 10.1 11.99 6.05 2.15 10.06 13.43 9.13 28.79 2.36 2.79 2.54
Vanguard FTSE Social Index Fund 12.56 13.82 5.66 0.05 10.56 14.45 5.31 32.9 2.48 2.79 0.77
Stewart Investors Asia Pacific Leaders Sustainability Fund 2.64 4.59 20.96 0 13.23 18.93 6.66 29.15 4.11 0 0
Vontonobel Fund – mtx Sustainable Emerging Markets Leaders 13.18 17.05 4.19 4.59 21.57 1.88 2.37 19.84 5.97 4.23 5.13
Northen Trust World Custom ESG Equity Index 8.77 10.52 5.49 0.99 10.93 12.79 5.07 22.28 2.52 2.66 1.24
Pictet – Global Environmental Opportunities 0 0 0 0 0 8.97 25.17 37.53 12.86 4.05 9.27
Pictet – Water 0 4.38 0 0 0 12.87 43.75 3.47 4.41 0 30.25
KLP AksjeGlobal Indeks I 10.74 12.25 6.23 2.02 9.99 13.52 8.21 28.88 2.53 2.52 2.78
Nordea 1 – Global Climate and Environment 0 0 4 0 0 4.42 36.94 32.31 15.16 1.52 5.64
Sector Exposure (%) of Top 10 ESG Funds

How To Build an E.S.G Portfolio?

Now that you have a comprehensive idea about ESG investing, the Best ESG Funds in India and worldwide are the best ways to build your E.S.G-compliant portfolio. First, let us look at the NIFTY 100 E.S.G Index to learn how to identify E.S.G businesses.

You can refer to the NIFTY100 E.S.G Index to build a portfolio of companies that comply with E.S.G guidelines in India.

Know NIFTY100 E.S.G Index

NIFTY100 E.S.G is a thematic index designed to reflect the performance of companies within the NIFTY 100 index based on their E.S.G scores. Please note that it’s not an E.S.G Fund. The NIFTY100 ESG index was launched on March 27, 2018, with a base date of April 01, 2011. Since its inception, Nifty100 ESG Index has grown 246%.

While the movement of NIFTY100 E.S.G has been steady for the most part, disruptions and market uncertainties during COVID-19 made the investors bet on ESG investing heavily. This implies investors have now started focusing on the company’s ability to sustain its businesses through social and environmental risk management.

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