Socially Responsible Funds: The rise and importance of ESG investing in India

Investing based on environmental, social and governance principles, or ‘ESG investing’, has gained much popularity across the world in the past few years. Globally, while most of the mutual funds and ETFs were losing their assets in the first half of 2020, the ones that stayed committed to core investing ideologies of ESG, more so during COVID-19 pandemic when investors shifted focus towards sustainable and ethical means of investment philosophy, those funds demonstrated their sustainability.

As per the recent data published by EPFR, socially responsible investing (SRI) or ESG investments have seen record inflows of $168.74 billion in 2020 versus $63.34 billion in 2019.

Given extreme and unforeseen weather and health hazards such as droughts, forest wildfires, floods, and the COVID-19 pandemic seen in 2020, it makes sense that institutional investors put ESG as an important condition for investing whereas corporations make ESG practices an inextricable part of how any business is done. Although, we must remember that ESG includes a lot more than issues related only to climate change, it in fact runs alongside the broader term of SRI. A lot has been written about what it is, much less about how ESG propositions link to value creation not only for stakeholders, but also for the economy. It, therefore, behoves us to understand, why ESG funds outperformed broader markets even in 2020 when the pandemic gripped the world.

As per S&P’s Global Market Intelligence analysis of 17 exchange-traded and mutual funds, 14 of these reported higher returns than the S&P 500 in 2020. Appetite for ESG investing has been growing in India especially after some large-scale fraud exposes in the last few years. Although a new concept in India, it seems to be resonating very well and accelerated during COVID-19 crisis. This is reflected in the flurry of ESG thematic funds that have made their debut in recent years including AXIS AMC, ICICI Prudential & Quantum India AMC launching their ESG Funds, SBI Mutual Fund reclassifying its equity fund as an ESG Fund and Mirae Asset Mutual Fund launching the ESG ETF (Exchange Traded Fund). It’s interesting to note that The NIFTY ESG Index in India has delivered higher five-year returns than NIFTY 50 in 2020, which is an unusual pattern.

Such resilient performance despite unruly markets gives us a hint about why investors are convinced about ESG funds. For one, the global demand for oil dried up due to the pandemic and it fell dramatically in 2020 to its lowest – turning it into negative territory for the first time in recorded history. Almost all ESG funds stayed away from oil and aviation stocks, hence their performance did not get affected by the tumbling demand. For another, the extent of the global humanitarian crisis brought together the focus on ESG issues of governments, businesses and more at a scale unmatched before. Finally, rather than platitudes and attractive offers, businesses faced the task of turning sentiments into action with defined communication to maintain the push in ESG issues.

The post-COVID world may feel the urge to return to the status quo, but businesses that fail to innovate will fall behind their counterparts in the long run. The truth is simple. If profits have traditionally been considered the most important metric for investors (and the easiest to measure quantitatively), it is now directly tied to a company’s impact on the planet and people. Contrarily, if ESG factors are not addressed proactively by a company, it can pose serious operational, financial, reputational, litigation and regulatory risks.

Right now sustainable impact investing is not only seen as the right choice ethically but also one that throws up a plethora of opportunities that can be leveraged smartly for long-term returns. The fact of the matter is that Indian companies are not governed by any standard rules on the way they should disclose their ESG strategy although most big businesses are gradually formulating ESG strategies at the board level so that they continue to remain attractive to its investors. Bold leadership and thoughtful reinvention by India Inc., like its global counterparts, are thus crucial. For instance, Royal Dutch Shell cut its dividend significantly and reduced refining business activity by 40 percent recently. Given it had been looking to diversify its portfolio into renewables for some time now, the pandemic gave them the opportunity to reposition its business for a low-carbon future.

India being the world’s third-largest contributor of carbon emission has a lot to lose from climate change thus its corporations and policymakers have a large role to play to reach net-zero in the long run. Many manufacturing companies have already installed highly energy efficient plants, and others are attempting to be efficient through retrofitting, new technologies and alternative energy options. Cement maker UltraTech which is primarily a carbon-intensive sector has integrated low carbon strategy into its business roadmap to address sustainability development goals (SDGs). This and its other initiatives in manufacturing process across all their plants have drastically improved the company's energy efficiency, earning them a global rank on Dow Jones Sustainability Indices. Likewise, to help FMCG companies achieve its SDGs,  plastic processing companies have re-jigged their product portfolio to include non-fossil fuel-based packaging made out of recyclable plastic waste,  thus showing the world initiatives that can be undertaken to prevent plastic waste from reaching landfills and oceans.

It is always in the best interest of any corporation, entrepreneur or investor that their resources are devoted to activities that create sustainable and worthwhile impact around them. Stakeholders and shareholders rarely compete in a zero-sum game. The 2020 pandemic brought together far reaches of the world to create a working vaccine, a virtual working environment, telecommuting, telemedicine and many such examples that provide abundant proof of this. Staying committed to the company’s sense of purpose, maximizing the life of the planet, the communities within it through organic collaboration do not put a dent in wealth creation or equity returns - in fact, quite the opposite.

Investors and business leaders, therefore, have a unique opportunity to restructure their priorities for a safer post-COVID world. If the past year has taught us anything, it is that only by aligning our goals and minds in the spirit of solidarity can we achieve tremendous feats.