ESG Mutual Funds: Assets Jump Amid A Search For Identity
Assets managed by ESG-focused mutual funds in India jumped more than fourfold in the last two years. Yet, most of these schemes mirror the benchmark indices, offering little, if any, differentiation.
ESG mutual funds in India managed assets worth Rs 12,320 crore as of November 2021, according to a report by Motilal Oswal Financial Services. That compares with Rs 6,710-crore assets as of November 2020 and Rs 2,630 crore a year earlier.
The rise is primarily attributed to the launch of several new mutual fund schemes around the ESG theme. Seven of the 10 ESG funds tracked by Motilal Oswal were set up after 2020.
Yet, ESG funds account for a tiny portion of India's mutual fund industry at 0.3% of total assets under management as of November. That could change with improvement in ESG disclosures and a renewed focus on governance reforms, the report said.
"India is also likely to see a higher allocation of funds in the form of sustainable investments in the coming years," Motilal Oswal said.
ESG mutual funds are dominated by blue chip firms, mainly from the information technology and financial services sectors. These tend to score better on ESG ratings as they are not heavily polluting and have relatively better governance standards.
According to Motilal Oswal, there was a median 50% overlap between ESG portfolios and the broader Nifty 100 index. For the benchmark Nifty 50, it was 30%.
"A closer review of the ESG portfolios shows a higher concentration of asset managers showing a preference for private sector lenders and IT services," it said.
"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," it said. "The overall sector-level ESG risk is lower for these businesses, resulting in the preference for them."
That's perhaps also why returns of ESG mutual funds, too, remain similar to that of benchmark indices. Data compiled by BloombergQuint as of October had shown that only two ESG-focused funds outperformed the broader market while half continued to offer near similar returns as the benchmark.
Over a longer time period, according to Motilal Oswal, ESG funds should outperform the benchmark indices. The report cited the sharp outperformance of MSCI India ESG Leaders index compared with the MSCI India Index.
"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."