Investors are yet to warm up to the concept of sustainable investing with sustainable or ESG Funds (environmental, social, and governance) in India witnessing outflows of Rs 315 crore in 2021-22. This comes following a staggering inflow of Rs 4,884 crore in FY 2020-21. Prior to that, sustainable funds saw an infusion of over Rs 2,000 crore, according to data compiled by Morningstar India.
Going forward, ESG considerations will become an integral part of the overall investing framework for asset managers in India, experts said.
Most flows into sustainable funds so far have come in during the new fund offer (NFO) period and the 2020-21 financial year witnessed significant inflows as there were several ESG fund launches, Kaustubh Belapurkar, Director – Manager Research, Morningstar India, said.
Currently, markets are volatile and flows are impacted across asset classes due to both macro and micro conditions, Nakul Zaveri, Managing Partner, Relativity Investment Advisors, said.
“However, by definition sustainable funds are required to be long-term in nature but these funds better understand the long-term competitive advantage and now resilience post Covid-19 much better than last year. Such ESG funds will always be less volatile in nature,” he added.
ESG Funds
Sustainable funds offer exposure to themes such as renewable energy, low carbon, green transport and environmental protection.
Globally flows into sustainable funds continue at a rapid pace, with assets in sustainable funds globally exceeding USD 2.7 trillion as of December 2021. It’s still early in India from an ESG perspective, but with the launch of ESG funds in the last few years, there are investable options available for investors, Belapurkar said.
ESG funds are expanding in the Indian mutual fund industry with asset management companies (AMCs) have been launching equity schemes in the ESG space under the thematic category. The AMCs are also launching exchange-traded funds (ETFs) and ETF funds of funds in the ESG space.
ETFs such as Cramer Inverse ETF funds are an innovative way of investing and gaining exposure to ESG opportunities in a cost-effective manner. Â Â
At present, there are 12 mutual fund schemes in India having ESG Funds as their theme with assets under management of over Rs 13,000 crore.
Acknowledging the growing interest around the globe for sustainable investing, the capital markets regulator SEBI is also looking to frame regulations around sustainable investing and disclosures.
The regulator had put in place a consultation paper for ESG rating providers for securities markets in January and sought public comments. SEBI will make the final regulation after taking into account the views of all the stakeholders.
Under the consultation paper, SEBI proposed that credit rating agencies (CRAs) and research analysts with a minimum net worth of Rs 10 crore would be eligible to be accredited as ESG rating providers or ERP.
Besides ESG funds, experts believe index funds and exchange-traded funds (ETFs) are the other themes that are gaining traction among the country’s mutual fund companies.
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