No takers for ESG investing? Sustainable funds see outlows for second year

There have been no new sustainable fund launches over the past two years.

Despite market regulator Sebi permitting mutual funds to launch six new categories under the ESG (environmental, social, and governance) theme last month, outflows from sustainable funds continued for the second year in a row with the June quarter registering an outflow of Rs 5.9 billion against an outflow of Rs 4.7 billion in the March quarter, due to profit-booking.

The Indian sustainable fund universe encompasses open-end funds and exchange-traded funds that, by prospectus or other regulatory filings, claim to focus on sustainability, impact, or ESG factors.

Year-to-date there has been an outflow of Rs 10.6 billion as against outflow of Rs 10.2 billion last year.  On the other hand, overall mutual fund industry has seen inflows of Rs 1.83 trillion  in the same period.

 

Indian sustainable fund assets have stagnated around the Rs 100-Rs 120 billion range due to lack of new fund launches in the past 24 months, according to a report by Morningstar.

As of June-end, asset of ESG funds stood at Rs 110.4 billion, up just 2 per cent on year.  

 While sustainable funds witnessed an outflow of Rs 1,930 crore last year, the overall asset has increased marginally due to mark-to-market gain, said Morningstar. 

While still nascent, with only 11 sustainable funds, the market is  concentrated

India's sustainable landscape, as per Morningstar

Currently India has just 11 sustainable funds and there have been no new fund launches in the past 24 months after witnessing a handful of sustainable fund launches in 2020.

The top five sustainable funds account for 87% of overall sustainable fund assets, with the largest fund accounting for 45% of overall sustainable assets.

The SBI Magnum Equity ESG strategy, which is the oldest sustainable fund, accounts for close to 45% of overall sustainable fund assets.

Active funds account for 97% of overall Indian sustainable fund assets, with the only passive fund being Mirae Asset ESG Sector Leaders ETF and fund of funds.

Currently, there are eight actively managed sustainable funds, one passive fund, and two global sustainable feeder funds. 

Rating: 

Equity sustainable funds are rated well according to the Morningstar Sustainability Rating, which is a peer-group relative measure of ESG risk. Within their global category (Indian equity), six funds carry a Sustainability Rating of 5 globes, two funds are at 4 globes, and one fund has a rating of 2 globes. About 87 per cent of the overall sustainable funds by assets have 5 globe ratings, said Morningstar report.

Why are ESG funds not  popular in India? 

ESG investing is in its very early days in India. It works like any other thematic investment scheme that invests in a specific industry or related domains. There is a considerable concentration risk, which may not be suitable for most retail investors.   

"ESG will  have high and low cycles like any other investment theme. Most retail investors can not identify such cycles in time and mismanage their entry and exit from the fund. To put this into perspective, between 2012-2021, only 9 out of 87 thematic funds outperformed the Nifty 100. Just 6 of these beat the index on a risk-adjusted basis. Therefore, I do not suggest that retail investors explore thematic funds like ESG. Instead, they should keep their portfolio simple through passive investing in broader indexes such as Nifty 50, Nifty Next 50 etc. Even if they like ESG investing, the allocation should not exceed 10% of the total portfolio," said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

" ESG is essentially a global License Raj where a committee decides which businesses are socially useful and which are not. We all know how effective that is going to be," said Dhirendra Kumar of Value Research. Kumar believes that all sectoral, thematic and such funds should be avoided, regardless of any particular purported quality, usefulness or track record. 

"Such thematic funds ideally are for more mature and agile investors who can get in and get out with the trend. For long term investors we don't recommend thematic or sectoral investments due to its susceptibility to short term trends," said Vivek Banka, Co-Founder, GoalTeller,  a leading Indian financial services company.

Regulatory disclosures

In the past few years, the Securities Exchange Board of India announced sustainability disclosure norms, also known as the Business Responsibility Sustainability Reporting, or BRSR, guidelines, for listed companies. These guidelines make it compulsory for the Top 1,000 listed companies to make sustainability disclosures. 

In a recent regulation, SEBI has looked to enhance these disclosures by announcing a set of key indicators, also known as BRSR Core, on which companies are expected to provide reasonable assurance. In addition, to avoid greenwashing, SEBI has also outlined disclosures for sustainable funds along with defined fund categories with specific sustainable approaches:

a. Exclusion

b. Integration

c. Best-in-class and positive screening

d. Impact investing

e. Sustainable objectives

f. Transition or transition-related investments

Asset managers can offer funds in each of these categories with disclosures around the specific strategies, investing at least 65% of the assets in stocks that make BRSR Core disclosures as well as disclosures around the underlying portfolio BRSR Core Scores.