Top 5 ESG Funds in India

A friend of mine turned vegan recently. A couple I know decided to adopt a child to cut down their carbon footprint. A colleague of mine is saving up to buy an EV. And I personally, am inspired by Greta Thunberg and pledged to buy any fashion item only when I am in dire need of one. 

You might wonder how are these related to one another? Or, if you keep up with the current happenings around the globe, you already know what this is about. 

Recent times have called for desperate measures to reduce pollution so that the only habitable planet we know does not vanish into thin air (if there's any air left for it, then 🤷‍♀️).

While the centres are doing the best they can, it is about time individuals start taking measures too. Some have, and some are oblivious to this. 

It is our responsibility to educate the Finology family regarding how to incorporate this in their daily investing lives. There is a way, and we shall talk about it today.

What is ESG?

The word “ESG” stands for Environmental, Social, and Governance. Now it has also become a criterion for financial analysis of any company. Nowadays, investors are more informed, and they include this information in their analysis before making any investment decision. 

This helps them provide a better understanding of the companies they are planning to invest in. Apart from the financial factors, investors have also started including non-financial factors in their analysis to manage risk and better opportunities. 

ESG investing trends 

Recently ESG has been in great demand. Usually, investors look for issues including climate change, social unrest, inclusion, and diversity, and firms that are more transparent in their actions, etc. After the pandemic, awareness about sustainability has increased and is included in the investment decisions as well.

Some of the characteristics evaluated in ESG Investing include resilience, resource utilisation, corporate ethics, human capital and occupational health and safety, land and biodiversity, and product governance.

What are ESG Funds?

ESG funds are basically funds where capital is allocated in the bonds and shares of the companies which perform well on criteria like environmental, social, and governance. It invested in the companies which adopt sustainable practices in their operations. Here, it is being checked how sustainable the company is on the basis of factors of ESG. In terms of bonds, it will include only those sovereign bonds of governments that have good sustainability scores. 

Importance of ESG funds

First of all, if the companies are sustainable, this shows that they are more responsible towards society and considerably the shareholders. It is vital as only pressure from investors can make the corporations responsible towards the community. 

This showcases that ESG funds are so relevant for the community. From the investor’s point of view, it is important as the government is also more focused on renewable energy and environmental issues. And it is expected that the tax will be imposed in future on companies generating high pollutants in the environment. 

Consumers are more aware and changing their lifestyle to more environmentally friendly, healthy, and natural products. As the government is making stringent roles regarding governance, the companies need to take decisions accordingly. 

Factors to consider while selecting ESG Funds

The companies with higher ESG scores need to be selected. One should consider the companies which are actively performing their corporate social responsibility. The products of the companies should be manufactured in an eco-friendly manner. Then the companies which are creating a positive social impact in society should be given the privilege and have strong corporate governance and ethics. Apart from this, the investor should look for funds that offer lower expense ratios and those that do not have any lock-in time or exit load. 

How do mutual funds choose ESG companies?

The funds either adopt exclusionary or inclusionary methods. Under exclusionary, they exclude the companies which do not meet the set standards of the environment. Social and governance. For Example, they may exclude ITC as it generates a higher amount of revenue from sales of cigarettes and tobacco products. 

While under the inclusionary method, they do the positive screening. The companies which outperform their competitors under this segment can be selected on the basis of some particular theme and if companies are working on some specific ESG challenges like gender diversity. They also choose companies whose projects create a positive impact on society. 

Top 5 ESG funds in India

1. SBI Magnum Equity ESG Fund 

This is the oldest fund available in the ESG segment. The age of this fund is around 8+ years. It was launched on 1st January 2013. The expense ratio of this fund is 1.29%, which is higher than other funds in this segment. Since its inception, this fund has provided a return of 15.84% per annum. As of now, this fund has assets under the management of Rs. 4,251 crores. In the past year, this fund has provided returns of 58.22%. The fund has its major investments in Tata Consultancy Services Ltd., ICICI Ltd., Infosys Ltd., Larsen & Toubro Ltd., and HDFC Bank Ltd. It usually invests in sectors including Technology, Automobile, Financial, Construction, etc. Its portfolio consists of 98.72% of equity, 0.06% of the debt, and remaining in other investment avenues. 

2. Axis ESG Equity Fund 

This fund was started on 22nd January 2020. It's been in existence for approximately 1 year and 8 months. It has provided around 39.35% return on average. In the last year, it has provided a return of around 60.52%. It has invested majorly in Avenue Supermarts Ltd., Wipro Ltd., Bajaj Finance Ltd., Tata Consultancy Services Ltd., and Nestle Ltd. This fund has an expense ratio of 0.48%, which is less than what other thematic ESG funds are charging. This fund has assets under management worth 2133 crores. 98.58% of its portfolio is allocated in equity while 0.76% is invested in debt and remaining in other investment options. Under equity, around 92.7% of funds are invested in large-cap companies. 

3. ICICI Prudential ESG Fund 

It is a medium-sized fund with an asset under the management of Rs. 1920 Cr. The fund was launched last year on 21st September 2020. It is charging an expense ratio of 0.6%, which is on par with what other ESG thematic funds in this category are charging. This fund has invested its money in sectors like FMCG, chemicals, Healthcare, Technology, and Financials with lesser exposure in financial and technology sectors compared to other counterparts in this segment. Talking about the returns, since inception, it is able to generate returns of 42.59% per annum. This fund's portfolio assignment consists of 95.9% equity, 0.02% debt, and 4.08% other options. 

4. Quantum India ESG Equity Fund 

It has been launched by Quantum mutual funds. It came into existence on 21st June 2019. It's been around 2 years and 3months that investors are pooling their capital in it. Till now, it has provided a return of 28.35% per annum to its investors. It charges an expense ratio of 0.9%, which is higher compared to other options available in the market. Tata Consultancy Services Ltd., Infosys Ltd., Housing Development Finance Corpn. Ltd., Wipro Ltd., and Tata Global Beverages Ltd. are the fund's top five holdings. Around 94.86% are invested in equity, 5.36% in debt, and remaining in other assets. This fund is different from others as out of equity, this has invested in both large-cap and mid-cap shares.  

5. Kotak ESG Opportunities Fund 

This scheme comes under the Kotak Mahindra Mutual Fund. It started not even a year back on 20th November 2020. This fund is just 10 months old. Since its inception, it has provided returns of 33.24% to its investors. It has an expense ratio of 0.37%, which is comparatively lower than other ESG funds available in the market. If we look at its allocation by sector, it has assigned a maximum percentage of funds (27.2%) in the financial sector. It has invested 98.78% of its funds in equity, 0.53% of the debt, and 0.69% in other investments. 

Conclusion

These funds usually ignore the companies which are harmful to any of the three pillars of environmental, social, and governance. However, diversification within this sector is not possible. As so many players are not offering such products in the market. It is being suggested to all the investors that the Nifty 100 ESG Index needs to be followed and checked before investing in this segment. Do you think in the future, the demand for such funds will increase among the investors or not? We believe so! 

*Disclaimer: The stock(s) discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.