Asset base of ESG-focussed funds drops by Rs 2,020 cr in FY23

Sustainable or ESG (environmental, social, and governance) focused mutual funds, which are in a nascent stage in India, have seen their asset base declining by Rs 2,020 crore in fiscal 2022-23 even as experts hope such funds will attract greater attention in coming years. ESG investing is gaining traction globally, and India is also witnessing an increased awareness and interest in sustainable and responsible investment practices. At present, there are 12 mutual fund schemes in India having ESG as their theme.

“With growing concerns about environmental and social issues, coupled with regulatory initiatives to promote ESG investing, the demand for ESG funds is expected to rise in the future. As more investors recognize the potential for both financial returns and positive impact, ESG funds are likely to attract greater attention and witness further growth,” Gopal Kavalireddi, Research Head of FYERS, said.

Kaustubh Belapurkar, Director – Manager Research, Morningstar India, also believes that investors’ interest in ESG funds will increase on growing awareness towards such funds in coming years.

However, flow is expected to remain muted for sustainable funds in the current financial year given that ESG investing is still in its nascent stage, he added.

According to data compiled by Morningstar India, 12 ESG funds together clocked assets under management (AUM) of Rs 10,427 crore in March 2023, which was Rs 2,000 crore or 16 per cent lower from Rs 12,447 crore registered a year earlier.

In comparison, the assets base of the ESG funds stood at Rs 10,998 crore in March 2021 and Rs 3,605 crore in 2019-2020. The decline in the AUM in FY23 in ESG funds could be attributed to several factors such as overall market sentiment and investor preferences shifting towards other investment options during the given period. Additionally, investors may have opted for profit-taking or rebalancing their portfolios, reducing investments in ESG funds, Kavalireddi said. According to him, short-term fluctuations in AUM do not necessarily reflect the long-term potential or performance of ESG funds.

Moreover, such funds have given returns in the range of 9 to 17 per cent in the past fiscal.

Sustainable funds, which are in a nascent stage in India when it comes to retail investor participation, have exposure to themes such as renewable energy, low carbon, green transport, and environmental protection.

Globally, flows into sustainable funds continue at a rapid pace, with assets in such funds reaching nearly USD 3 trillion as of December 2021. It’s still early in India from an ESG perspective, but with the launch of ESG funds in the last few years, there are investable options available for investors.

ESG funds are expanding in the Indian mutual fund industry and asset management companies (AMCs) have been launching equity schemes in the ESG space under the thematic category. The AMCs are also launching exchange trades funds (ETFs) and ETF fund of funds in the ESG space.

Most flows into sustainable funds so far have come in during the new fund offer (NFO) period and the financial year 2021-22 witnessed significant inflows as there were several ESG fund launches.

Acknowledging the growing interest around the globe for sustainable investing, the capital markets regulator Sebi is also coming out with proposals around sustainable investing and disclosures.

Recently, Sebi has proposed allowing mutual funds to introduce five new categories under ESG schemes and mandating ESG schemes to invest at least 65 per cent of AUM in listed entities where assurance on the BRSR code is undertaken.

These measures are aimed at ensuring greater transparency, authenticity, and adherence to ESG principles.

By providing clearer guidelines and promoting responsible investing practices, Sebi’s initiatives can enhance investor confidence in ESG funds and foster the growth of this segment, FYERS’ Kavalireddi said.

The enhancement of ESG disclosures will aid fund managers in having access to better information on corporate sustainability practices to make investment decisions, Morningstar India’s Belapurkar said.