Mega trend: ESG investing gaining traction in India

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The Covid-19 pandemic accelerates demand for sustainable ESG investing in india, Motilal Oswal Financial Services (MOFSL).

The ESG (environmental, social, and governance) factors determine a company’s impact on society and environment.

It gives a non-financial glimpse on the prospects of future opportunities and risks to the business.

“While the size of ESG investments in India from a global sustainability AUM perspective may be negligible, it has been growing significantly.”

Even domestically, aggregate AUM in ESG funds as of November 30, was just 0.3 per cent of the MF industry AUM.

“However, Covid-19 has further accelerated the demand for sustainable investing. 7 of 10 ESG funds in India currently have been launched since January 2020.”

“ESG funds witnessed strong inflows, with aggregate AUM jumping to Rs 123.2 billion in November 2021, from Rs 26.3 billion in November 2019, reflecting a ‘4.7x jump’ over a two-year period.”

Besides, a few ESG indices have come up in the country, namely MSCI India ESG India, launched in 2007, NSE100 ESG Sector Leaders index and S&P BSE 100 ESG index, launched in 2017.

“Since most of the ESG funds have started recently, it would be premature to evaluate their performance with benchmark indices.”

“However, early trends suggest the performance of the ESG funds has been in line with the benchmarks, and the outperformance is not evident yet.”

According to MOFSL, one of the reasons the funds have generated market returns could be due to a high degree of overlap with the benchmark.

As per the latest portfolios, there was a more than 50 per cent median overlap between the ESG portfolios and NIFTY100 and an around 30 per cent overlap with NIFTY50 as well as the respective flagship funds.

“Globally, historical evidence suggests ESG funds have outperformed their benchmarks over the long term. The same should be applicable even for the Indian markets, if the ESG principles and practices are implemented in spirit.”

“In the developing markets, given the nascent stage of the capital markets, we believe the outperformance of the ESG funds should be sharper – as the gap in practices between the ESG leaders and laggards is larger.”

This trend, MOFSL is evident from the sharp outperformance of the MSCI India ESG Leaders index versus the MSCI India index.

“A closer review of the ESG portfolios shows a higher concentration of asset managers showing a preference for Private Sector lenders and IT Services. Companies in IT Services are global leaders with mature business practices and generally good governance standards.”

“Private Sector lenders work under the RBI’s close lens, and most practices are regulated and institutionalised, leading to better governance practices. Both of these sectors also have high institutional shareholding, and as a result, the push from investors has necessitated the implementation of global best practices.”

In addition, the overall sector-level ESG risk is lower for these businesses, resulting in the preference for them.

20211218-130800

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