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ESG Fund Explained – Impact of ESG Mutual Funds in Global & Indian Markets

ESG funds invest in stocks of companies based on their environmental, social, and governance factors. Investments in these companies are highly sustainable. Let us get into the details of ESG Funds.

The month of May 2022 has just ended. Many Indians must be heaving a sigh of relief that one of the hottest summer seasons is finally ending. Soon it will start raining, bringing down the abnormally high temperatures. Extreme weather conditions are becoming very normal these days due to climate change. Factors like deforestation, pollution, etc., are deteriorating the environment with every passing day. As a result of climate change, many companies are racing to make themselves ESG compliant so that their growth is environmentally sustainable and socially inclusive, along with good governance. This blog will focus on what are ESG funds and their impact.

What is ESG?

The acronym ESG stands for environmental, social, and governance. Many companies are working towards either becoming fully ESG compliant or as much as possible. ESG has the following three components to it:

  1. Environmental (E)
    • As the name suggests, this component is related to conserving and protecting the environment. It involves being carbon positive or neutral, conserving either the same or more water than using, using clean energy sources, etc. Companies can do this by using electric vehicles instead of those that use fuels that pollute the environment, planting more trees, using solar, wind, or hydel energy instead of thermal energy, recycling water, recycling waste, etc.
  2. Social (S)
    • The social component involves having fair employee policies. Some of these include gender neutrality, promoting work-life balance culture, giving equal employment opportunities to all, having a zero-tolerance policy for racism, having various employee welfare schemes, etc.
  3. Governance (G)
    • The governance component deals with following various corporate governance standards, having proper grievance redressal policies with various hierarchy levels, having an ethics policy and code of conduct, a strong whistleblower policy, etc.

What is ESG mutual fund?

An ESG fund invests in equity shares of companies that are ESG compliant. The fund either invests in companies that are a part of an ESG Index or gives scores to companies based on various ESG parameters and then invests in them depending on their ESG score. An ESG fund is a thematic fund. As per SEBI, a thematic fund that follows the ESG theme has to invest a minimum of 80% of its total assets in equity and equity-related instruments of ESG compliant companies.

Now that we understand what is ESG mutual fund let us look at their performance.

Performance of ESG mutual funds in India

Let us look at the performance of some ESG mutual funds in India.

Scheme nameAUM (Rs. crores)3-months6-months1-year
Quant ESG Equity Fund755.80%2.67%27.36%
Invesco India ESG Equity Fund777-7.19%-11.24%8.61%
SBI Magnum Equity ESG Fund4,272-4.97%-9.08%6.34%
Aditya Birla Sun Life Fund1,013-9.94%-15.41%4.29%
Quantum India ESG Equity Fund59-3.16%-7.73%3.24%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/sectoralthematic.html)

Note: The returns are as of 30th May 2022. The returns are for direct plans with growth option. The three months, six months, and one-year returns are absolute. We have considered up to one year’s performance because most ESG funds have completed only one year since their launch. The funds have been ranked based on one-year performance.

The essence of ESG in the global and Indian markets and the way forward

At a global level, the ESG market is very big. As per a Bloomberg report, the ESG assets under management are projected to reach $53 trillion by 2025. ESG AUM is expected to form a third of the projected global $140 AUM. Europe is the biggest market for ESG, followed by the US. Currently, most companies are focused on the E (environmental) part of the ESG, followed by S (social) and G (governance).

In India, many AMCs have launched ESG fund schemes since the start of 2021. As per a Business Standard report, the ESG AUM was at Rs. 2,268 crores in March 2019. In three years, the ESG AUM jumped by 5 times to Rs. 12,447 crores in March 2022. Even after such exponential growth, the ESG market in India has a long way to go before we can compare it to Europe or the US.

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