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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

Did you see the Google Doodle on Earth Day? It was the simplest wake-up call we’ve seen in some time. The image showed the physical changes on Earth. But the timeline is terrifying – in just two decades, the Earth has become worse.

In case you missed it –

Are you wondering what connection Google Doodle has to Investing? We want you to know more about investing in sustainable businesses. That image indicates the rapid changes Earth has undergone due to rampant deforestation, increase in global temperatures, shrinking waterways, and more. It is the cost we may pay for economic growth and welfare. But don’t you want to invest responsibly?

Well, the blog is about sustainable profit through ESG investing.

E.S.G. investment is the latest investing methodology investors are betting on these days. E.S.G. full form is Environmental Social and Governance. Although E.S.G. 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 ESG-compliant portfolio, and a list of the latest top-performing ESG funds in India.

What are E.S.G. 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, prohibiting investing in businesses dealing with weapons, lending, etc.

The rising importance of corporate social responsibility (C.S.R.) 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 (P.R.I.) for incorporating ESG factors into business policy and strategy.

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

What is The E.S.G. Investment Component?

ESG investing is also known as socially responsible investing, impact investing, or sustainable investing. As the name suggests, investing in assets with a focus on environmental, social, and governance-related factors. As an investor, you look at the financial performance of the company. However, ESG factors have more importance and higher weightage. Such a style of identifying potential businesses, which weighs better on the ESG parameters, is known as the ESG. Investing methodology.

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What Are ESG Funds?

ESG funds are those funds whose asset allocation primarily includes companies’ areas and/or bonds that are evaluated based on Environmental, Social, and Governance factors. While Europe accounts for half 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.

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The boom in E.S.G. Investing and E.S.G. Funds

Recent times have seen a remarkable expansion of E.S.G. investing and E.S.G. Funds in India and Global economies. In 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 E.S.G. funds. Between 2020 and 2021, 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, no specific date marks the beginning of E.S.G. investing in India. Scores of developments and policy reforms took place over the last decade to guide E.S.G. investing in India.

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

Significant Developments that Built the Foundation of E.S.G. Investing in India

2008 – CRISIL, Standard and Poor, K.L.D. 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 (M.C.A.) issued Corporate Social Guidelines. It recommended all businesses must develop C.S.R. 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 that almost 100 listed companies 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 C.S.R. activities.

2015 – SEBI extended the 2% C.S.R. 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.

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Why Is E.S.G. 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 E.S.G. 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 E.S.G. 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 E.S.G. Funds in India and their performance

E.S.G. FundAsset Under Management (Rs. Cr.)% 1 Year Returns% CAGR Till Date
Quant E.S.G Equity Fund9021.952.9
Quantum India E.S.G Equity Fund61-117.9
Axis E.S.G. Equity Fund1806-9.316.9
Mirae Asset Nifty 100 ESG Sector Leaders Fund of Fund136-0.816.6
ICICI Prudential E.S.G Fund1412-615.1
Invesco India E.S.G Equity Fund750-2.714.3
Adity Birla Sun Life ESG Fund1001-5.112.5
SBI Magnum Equity E.S.G. Fund45091.612
Kotak E.S.G. Opportunities Fund1452-6.78.8
HDFC Housing Opportunities12093.55.9

Rise of E.S.G. Around the World

In January 2004, former U.N. Secretary-General Kofi Annan invited 50+ C.E.O.s of major financial institutions to take part in a joint initiative under the guidance of the U.N. 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 (P.R.I.). Its role is to forward the integration of E.S.G. investing into analysis and decision-making through thought leadership.

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

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2013 – A Tipping Point for E.S.G. investing

The growth of E.S.G. 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 (G.R.I.) launch in 2000.

Over 80% of the world’s largest corporations use G.R.I. standards. The adaption of E.S.G. investing and E.S.G. funds picked 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 E.S.G. 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 E.S.G. equity funds.

Top 20 Largest ESG Funds by AUM

NameAUM ($Bn)InceptionOrigin CountryFund Type
Parnassus Core Equity Fund22.941992U.S.Active Fund
iShares ESG Aware MSCI USA ETF13.032016U.S.Index-based ETF
Vanguard FTSE Social Index Fund10.872000U.S.Index-based Fund
Stewart Investors Asia Pacific Leaders Sustainability Fund9.872003U.K.Active Fund
Vontonobel Fund – mtx Sustainable Emerging Markets Leaders9.582011LuxembourgActive Fund
Northern Trust World Custom ESG Equity Index8.692013IrelandIndex-based Fund
Pictet – Global Environmental Opportunities8.312010LuxembourgActive Fund
Pictet – Water8.022000LuxembourgActive Fund
KLP AksjeGlobal Indeks I7.692004NorwayIndex-based Fund
Nordea 1 – Global Climate and Environment7.372008LuxembourgActive Fund
Parnassus Mid-Cap Fund6.92005U.S.Active Fund
iShares ESG Aware MSCI EM ETF6.832016U.S.Index-based ETF
iShares Global Clean Energy UCITS ETF6.522007IrelandIndex-based ETF
iShares Global Clean Energy ETF6.512008U.S.Index-based ETF
Nordea 1 – Emerging Stars Equity Fund6.412011LuxembourgActive Fund
TIAA-CREF Social Choice Equity Fund6.321999U.S.Index-based ETF
Handelsbanken Hallbar Energi5.852014SwedenActive Fund
Putnam Sustainable Leaders Fund5.811990U.S.Active Fund
iShares MSCI USA SRI UCITS ETF5.632016IrelandIndex-based ETF
Calvert Equity Fund5.371987U.S.Active Fund

Sector Exposure of Best 10 E.S.G. Funds by AUM

Sector Exposure (%) of Top 10 ESG Funds

FundCommunication servicesConsumer discretionaryConsumer StaplesEnergyFinancialsHealthcareIndustrialsITMaterialsReal EstateUtilities
Parnassus Core Equity Fund11.327.888.5206.1710.6118.1732.483.381.470
iShares ESG Aware MSCI USA ETF10.111.996.052.1510.0613.439.1328.792.362.792.54
Vanguard FTSE Social Index Fund12.5613.825.660.0510.5614.455.3132.92.482.790.77
Stewart Investors Asia Pacific Leaders Sustainability Fund2.644.5920.96013.2318.936.6629.154.1100
Vontonobel Fund – mtx Sustainable Emerging Markets Leaders13.1817.054.194.5921.571.882.3719.845.974.235.13
Northern Trust World Custom ESG Equity Index8.7710.525.490.9910.9312.795.0722.282.522.661.24
Pictet – Global Environmental Opportunities000008.9725.1737.5312.864.059.27
Pictet – Water04.3800012.8743.753.474.41030.25
KLP AksjeGlobal Indeks I10.7412.256.232.029.9913.528.2128.882.532.522.78
Nordea 1 – Global Climate and Environment004004.4236.9432.3115.161.525.64

Why Is E.S.G. Investing Gaining Popularity?

The younger generation demands an E.S.G. stance.
The millennials are highly active and vocal about environmental issues and climate change. They want to see if the companies they invest in are ethical and support global causes. For example – The save the Planet campaign raised the issue of single-use plastic overuse.

Many companies using plastic or disposing of plastic as part of their manufacturing process or as part of their product offering took a beating in the stock market. These companies had to use alternative products to plastic to be relevant in the eyes of the investor (e.g., Moving from plastic bags to paper bags at supermarkets) or face the heat from all the stakeholders of the company.

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After being thoughtful about world problems and investing in a sustainable environment, there is another aspect you must consider -E.S.G. stocks performing better. The historical performance suggests that E.S.G. themes have performed much better than non-E.S.G.-based portfolios. These E.S.G. portfolios also do well during global events like the Covid-19 pandemic.

E.S.G. Trends Are For Long-Term
Many investing themes stay for 5-10-15 years, and then they fade away. On the other hand, E.S.G. trends are here to stay for an exceptionally long time and maybe a few decades. For example, the most-noticeable long-term themes can move from fossil fuels to renewable energy sources. If you believe in such trends and decide to be on board this journey, you may benefit as it develops and these companies grow. You may be able to future-proof your portfolio through E.S.G. investments.

Factors To Consider While Selecting E.S.G. Stocks

Most E.S.G. funds use a rigorous review process to pick the stocks. They look at quantitative E.S.G. metrics that match the ideology and vision of the funds. Moreover, they consider parameters such as greenhouse gas and carbon emissions too.

So, companies with higher carbon footprints, like coal miners, tobacco manufacturers, and oil and gas companies, lose points and do not feature as E.S.G-relevant companies. On the other hand, companies in the renewable energy industry, FMCG, technology, and healthcare typically feature in the E.S.G. portfolios.

The E.S.G. rating or score – is a must for investors to evaluate. An E.S.G. rating is a way to measure a company’s level of sustainability. External agencies calculate the score based on factors such as environmental impact, employee engagement and working conditions, and best practices. An E.S.G. score can range from 0 to 100.

How To Build an E.S.G. Portfolio?

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

  1. Lack of universal global E.S.G. standards
    E.S.G. investing is a new concept, so, it does not have a recognized global standard. There are global benchmarks for investors to check, analyze, compare and take decisions. There are no agreed-upon standards to evaluate the performance of E.S.G. applications and implementation for any company. Such inconsistencies create confusion when comparing two different E.S.G. funds as the application of funds may be drastically different from theirs. One of the E.S.G. funds holds tobacco stocks as the definition for that fund, which meets the criteria.

    • Lack of enough historical data
      There is hardly any data available for investors to analyze. Long-term data does not suggest ESG funds as a financially viable option. Such untrue inferences may drive the investors away from these funds.

    • No mandated E.S.G. reporting governance
      Today, SEBI has not mandated a reporting structure for listed companies about their efforts on E.S.G. initiatives. The E.S.G. companies voluntarily issue regular reports and commentary, which may be inconsistent with any other company – hence, not comparable. E.S.G. reporting is not a priority for the board members of all the companies yet.

    If you are planning to invest in the future, make sure you invest in themes that are here to stay for the future. Identifying E.S.G themes and following a structured approach may be a profitable investment strategy for your long-term portfolio.

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