The Covid-19 pandemic has been a defining event in many ways. Among the several new goals that the Covid crisis has brought to the forefront, ESG investing is steadily gaining ground.
Before the virus, many had looked at ESG (an acronym for environmental, social and governance) analysis merely as a fad that would eventually fade away. But the pandemic has made us to sit up and take note.
It has become a kind of litmus test for brands to gauge how sustainable their business practices are while adopting a socially responsible approach.
ESG investing is shaping up how investors pick up brands to back. In international markets, ESG funds have been the talk of the town for a few years now. Perhaps, the wake-up call for ESG investing came when British brand Boohoo was held to account amid allegations of poor working conditions at the factories it operated in Leicester, which prompted investors to take a second look at the brand they were backing.
Things escalated quickly when Standard Life Aberdeen, one of the largest shareholders in Boohoo, sold nearly all its shares in the company and criticised the brand’s apathetic response to the allegations.
The brand was quickly delisted from aggregator sites like Amazon, Next and ASOS when allegations about how the brand was putting its workers at risk of contracting the virus amid poor working conditions surfaced.
ESG investing scenario in India
ESG investing is still at a nascent stage in the Indian financial markets. But with the pandemic acting as a motivator, it is seeing rapid adoption. HNIs have, in particular, exhibited growing appetite for ESG investing in the country’s financial landscape. Over the past few months, Indian market has seen the launch of quite a few ESG funds, like the SBI Magnum Equity ESG Fund, the Quantum India ESG Equity Fund and the Axis ESG Equity Fund. These schemes focus on investing in companies that adhere to specific ESG criteria.
This year is proving to be a particularly good for ESG investing in the Indian financial landscape. Most of the top ESG funds in the market have added up to 27% assets under management (AUM) within the first quarter of FY21. The SBI Magnum Equity ESG Fund has jumped 40 per cent since March 23, 2020, while the Quantum India ESG Equity rallied by 38 per cent over the same period.
NSE’s Nifty 100 ESG Index has also performed positively, considering that it has done better than Nifty100 with a CAGR of 10 per cent (against Nifty100’s 8.7 per cent).
So, is India the next hotspot for ESG investing?
Given how ESG investing is quickly gaining traction in Indian market, we could very well be poised to emerge as the next big player in the ESG landscape. Investors in the retail segment are growing increasingly aware of the ethical side of investing, particularly after the pandemic changed the world as we knew it. And the numbers add up too, because in times since the lows seen in March 2020, ESG funds have delivered returns as high as 46 per cent.
Also, more ESG funds are likely to be introduced in the market soon. Many of India’s top fund houses have plans in the works to launch ESG funds. And if the grapevine is to be believed, some of them have already filed offer documents with Sebi. Leading AMCs like SBI Mutual Fund are even reportedly including ESG research as a part of their core investment process.
All these developments clearly point to the possibility that India’s financial markets are readying to embrace ESG investing this time around.
Who makes up India’s ESG investor segment?
At first glance, it appears that many HNIs have placed their money on companies that rank high on the ESG criteria. These investors possess a high net worth and look for alternative, often more radical, avenues for investment. Given the rapidly rising need for businesses that are sustainable, have quality governance and are socially responsible, HNIs are gravitating towards ESG funds.
Along with HNIs, there’s another demographic group that is particularly attracted to sustainable investing – millennials. The Cone Millennial Cause Study from 2006 revealed that millennials are more likely to trust a company that has a reputation of being socially or environmentally responsible. That attitude is now being reflected among India’s millennial investors too.
That said, both these segments are largely data-driven and sieve through a vast amount of information prior to taking any decisions. Thus, mere social factor is not driving investments, but sustained investment opportunity is.
What’s the future of ESG investing in India?
From where we stand now, the future of ESG investing in India appears bright and full of potential. The winds of change have brought in promising prospects, and as ESG investing picks up with greater vigour in financial markets, investors, brands and the society as a whole stand to benefit. We are sure to see increased focus from the industry leaders to align themselves with the ESG mandate, not only as a feel good factor, but from business sustainability perspective.
We will see more and more research houses come out with ESG scores for companies, which in turn could be a decision-making parameter for investors, both institutional, as well as retail.
The transition to ESG investing will not happen overnight; it may take a while to materialise. Investors may begin by allocating a small portion of their corpus to these assets to test the waters, so to say. Nevertheless, without a doubt, the equity market in India is slowly, but surely, going green.
(The author is Head of Acquisition and Relationship for HNIs & NRIs at Axis Securities. Views are his own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)