ESG Mutual Funds gain traction in India

Several Asset Management Companies (AMCs) have launched ESG Mutual Funds in India. ESG Mutual Funds invest in businesses that are responsible. Ever since its launch in India, the MSCI India ESG Leaders index has not only outperformed the MSCI India Equity index1 but has also mitigated downside risk better. The ESG mutual funds’ performance was well evident during Covid-19 induced market volatility. ESG investing though a popular concept globally has huge potential in emerging markets like India.

ESG as a concept has evolved to a point where it is no longer just a luxury but has become a necessity in the present-day scenario. The objective of an ESG mutual fund is to build wealth to fulfill investor’s financial goals by investing in stocks that meet the ESG parameters.

The non-financial parameters of ESG mutual funds have a material impact on the company’s future performance. ESG mutual funds do not look solely at profit but also considers the impact on the planet (environment) and people (social) as equally important too. It helps investors evaluate the level of preparedness among companies to control the material risks that can impact the business over the long term. ESG mutual funds use a structured approach of assessing the sustainability of companies by identifying the potential risks that could have a lasting impact on the company’s valuation.

As more and more investors choose to invest responsibly, they realize that ESG is not a just check-the-box desk research. The challenge is the lack of quality data and the standardization of quantification of non-financial data. Investors should not limit the research of identifying such companies by looking at self-declared company disclosures. They should be cognizant of greenwashing, where the company claims to be ESG compliant but it is not, to capitalize on the opportunity of labeling themselves as ‘ESG-oriented.’

The second challenge is to increase awareness among investors that ESG mutual funds are a holistic way of assessing the sustainability of businesses. It is the understanding that responsibility and profitability go hand-in-hand.

1 MSCI Indexes supplied by MSCI Inc, and MSCI ESG Indexes supplied by MSCI ESG Research Inc, a subsidiary of MSCI Inc

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