Return-Hungry Retail Investors Have No Time For ESG
As a retail frenzy sweeps India’s equity markets, ESG is in a chicken-and-egg situation. Will standout options draw small, individual investors or will demand create quality supply?
So far, there's neither.
Environment, social and governance factors still don't play a huge role in influencing money decisions of retail investors, according to financial advisors and analysts that BloombergQuint spoke with. And lack of awareness is one big reason.
"This is a case of enough people simply not knowing what it is," said Amol Joshi, founder of PlanRupee Investment Services. "When I say auto or finance as an investing theme, investors know exactly what is being talked about. But there's no picture that pops up in their mind when I say 'ESG' or 'sustainable investing'."
Among my clients, nobody actively brings up ESG as a topic when they discuss their investments.Amol Joshi, Founder, PlanRupee Investment Services
Sustainability is already dictating companies' behaviour. Concerns about climate and social risks are driving a shift of global capital towards sustainable assets. More than ever, funding is now being tied up with explicit ESG goals. Over $40 trillion has been pumped in globally in ESG-focused investments, according to ESG Risk Assessments & Insights Ltd.
That's spurred some of the biggest Indian businesses to announce roadmaps of how they would reduce emissions and improve ESG performance. In India, 7% of the assets under management are ESG investments. That number's likely to rise to 30% by 2030.
But most of it fails to capture the imagination of the Indian retail investor for whom outright returns are still a bigger priority. More so in the last year and a half that saw record addition of investors looking to ride an unprecedented equity rebound from the pandemic lows.
"I don't think Indian investors are at a stage right now where factors like ESG impact investment decisions for people," Mrin Agarwal, founder of investment advisory firm Finsafe, said. "They are not looking at ESG because it's not something that's standing out in terms of returns. The near term performance is just not there."
According to Morningstar data, India currently has only nine ESG-focused mutual funds scheme with assets of over Rs 12,000 crore. Barring two, all these ESG funds were set up after 2020 and lack the advantage of demonstrating a long-term track record. Whatever record they do have may also not be enough to convince a retail investor.
In 2021, only two of the nine ESG-focused funds managed to outperform the broader markets. Year-to-date returns of half of these funds have remained nearly similar to that of benchmark NSE Nifty 50.
ESG funds have also cumulatively seen net outflows for seven of the first eight months of the year, according to Morningstar—the one month with positive flows saw a new fund offer. By comparison, the Association of Mutual Funds in India's data shows that equity mutual funds have recorded net inflows for seven straight months.
"Even though investors want sustainability as a factor, they also want returns," said Dhaval Kapadia, director-portfolio specialist at Morningstar Investment Adviser India Pvt. "It depends on the view that you take. From the medium-to-long term perspective, sustainable factors could drive performance. But there isn't enough history to show that yet."
It is also unclear as to how much of an impact ESG factors have on returns. Proponents say that a firm with good ESG scores is bound to do yield better returns in the long run as it would be more immune to future business shocks. There is also a view that lower risks would lead to lower cost of debt.
However, skeptics like Aswath Damodaran, professor of finance at the Stern School of Business at New York University, argue that the ESG pitch is "inconsistent and fundamentally incoherent" as much of that future impact would already be priced in by the markets.
Returns aside, Joshi said none of these ESG funds offer anything drastically different from traditional mutual fund schemes. They tend to be dominated by information technology and financial firms as these companies score better on ESG metrics. "Anyway, our benchmark indices are roughly dominated by these sectors itself. So, there's no real differentiation in the portfolio that you get by investing in an ESG fund."
Supply Versus Demand
In a recent survey by Standard Chartered, the scarcity of standout options was a reason cited by the majority of individual investors on why they had apprehensions about sustainable investing. "There is definitely a need to cater to the retail investors with more localised and varied sustainable investment products," said Samrat Khosla, managing director and head of wealth, India at Standard Chartered.
According to Khosla, if enough distinct options were available, investors would be willing to live with the trade-off of slightly lower returns. "About 67% of Indian investors in the survey said they would take greater financial risks to gain social benefits."
Yet, it’s a long way for those intentions to translate into actual investments. “The real change will be when sustainable investing is the core of any portfolio and not a small part of it,” said Prableen Bajpai, founder of FinFix Research and Analytics. “If investors really become conscious about ESG-compliant investing, there will be more choices automatically.”
If there is demand, supply will follow.Prableen Bajpai, Founder, FinFix Research and Analytics
Joshi said it would take a whole market cycle, traditionally of about five to seven years to see an increase in uptake. “The ESG investing theme has to either outperform other investment themes, or at least during a downturn it has to offer better protection. That's what will attract the attention of the retail investors.”
For now, the retail investors who may be interested in sustainable investing will have to look beyond borders for options, Khosla said. "Indian investors could broaden their allocation to international markets, where many more sustainable investments options are available, such as cash and alternative investments.”