Rise of ESG Funds in India

Background

The ESG funds, as the name suggests, refer to the funds that give due importance to the environmental, social and cooperate governance concerns for the purpose of investment. The ESG funds follow the practice of finding the companies that excel or score the highest on these three parameters in order to ensure sustainability of investment returns and performance rather than focusing on maximising the returns only. These funds are categorised as Thematic Funds i.e. the equity mutual funds which invest in stocks based on a particular theme.  The origin of ESG funds can be linked with the idea of SRI (Socially Responsible Investment). However, the ESG focus on the financial returns and economic value whereas the SRI gives due importance to the ethical and moral intricacies. In a time when the legal, political and the corporate fraternity is becoming increasingly conscious about the impact of climate change and environmental degradation owing to human activities, the ESG investment is estimates at over $20 Trillion around a quarter of all professionally managed assets around the world.[1] The Former United Nations Secretary General Kofi Annan, in the year 2004, took the initiative to encourage the ESG investment in the capital market in the world as well.

ESG Funds in India

The rise of ESG Funds has been one of the most defining trends in Indian Business world in 2019. It saw big entities in the Indian market launch these funds recently. The SBI Mutual Fund launched the ESG funds in 2018, the Axis Mutual Funds and Quantam Mutual Funds launched them last year. The SEBI (Stock Exchange Board of India) has issued a guideline making it mandatory for the top 1000 companies to prepare an annual business responsibility report (BRR).  Moreover, India is the first country to make it mandatory for all the companies having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year to constitute a Corporate Social Responsibility Committee.[2] CSR refers to a company’s responsibility of taking care of and investing in environmental and social causes. Investment in ESG funds can be understood as an extension of a company’s corporate social responsibility as it caters to both the units i.e. the financial needs of a company as well as the society and environment. The CSR is known as a Triple Bottom Line Approach which refers to the assessment of a business entity on the basis of its relation with three elements i.e. profit, people and planet. What remains to be seen is the long term impact of these funds on the Indian market as the time is still not the ripest to invest in the ESG funds in the absence of any uniform system of screening any entity’s ESG and subsequently collect and publish reliable data.

[1] George Kell, The Remarkable Rise of ESG, Forbes, (Jun. 11, 2018, 10:09 AM), https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/#2e7eb15a1695

[2] Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).