The latest move of the Securities and Exchange Board of India (Sebi) to expand the scope for ESG (environment, social and governance) funds with the introduction of six sub-categories comes at a time when returns from the existing schemes have shown a healthy trend.
Currently, only three ESG funds have completed three years and have returned between 14% and 23% CAGR. There are only 10 ESG schemes at present, show data from Value Research. With the new norms, fund houses will now be allowed to expand their offerings with more than one ESG fund.
SBI MF accounts for almost half the ESG funds with an AUM of close to Rs 5,000 crore.
Fund houses have welcomed the new norms, saying fresh regulations bring in much-needed clarity and transparency. This, they say, will also help investors who now recognise the importance of aligning investments with ethics and principles.
Navneet Munot, MD and CEO of HDFC MF, said the new sub-categories were introduced based on the recommendations of the ESG advisory committee. He said the objective is to develop this segment and encourage more fund houses to offer ESG schemes.
Among the existing funds, only three — SBI Magnum Equity ESG Fund, Axis ESG Equity Fund, and the Quantum India Equity ESG Fund — have been in existence for more than a year. On a three-year basis, Axis’ ESG fund has given a 15% return, while that of SBI has generated above 20% on a CAGR basis.
“Most funds were following the ‘exclusion or negative screening strategy’, which constrained the universe. Further, a lack of consistent and comparable ESG data limited the funds to predominantly largecap options. Now, with mandatory BRSRs for top 1,000 listed entities and the new sub-categories for ESG funds, AMCs will have the headroom to design funds with specific objectives, specific sustainability or transition themes, multiple market caps and to decide whether or what to exclude with the ESG perspective,” said Priyanka Dhingra, ESG analyst at SBI Mutual Fund.
While Quantum India’s ESG scheme has given CAGR returns of 21.77% over three years, it is a relatively smaller player, with an AUM of just Rs 68.7 crore.
Dhingra said the expansion in scope for offerings will give investors a larger product basket to choose from while creating a positive social and environmental impact.
However, some are wary of being too bullish on the theme, and are treading with caution.
A senior executive of a fund house, who did not wish to be named, said: “ESG may have taken off in Europe, but it’s yet to generate much interest in India. Keeping environmental and social concerns in mind is encouraged, but one needs to consider revenues too. ESG doesn’t attract as much money.”
Present norms only allow one ESG fund under the ‘thematic’ category. Following industry representations, the regulator recognised the need for enhanced scheme disclosures for informed investment decisions and to “prevent greenwashing”.
The six sub-categories are — exclusion, integration, best-in-class & positive screening, impact investing, sustainable objectives, and transition/transition-related investments.
Sebi has mandated asset management companies to ensure that at least 80% of the total asset under management of ESG schemes are invested in equity or equity-related instruments of any particular strategy, while the remainder cannot be in contrast to that strategy.