Why should you invest in ESG Mutual Fund?

12 FEBRUARY, 2021

ESG (Environmental, Social and Governance) investing is increasingly getting more popular in the world today. Investors, especially foreign funds, take a hard look at companies for their ESG records before deciding to invest in them. ESG companies are generally perceived to be more ‘ethical’ than their peers.

  • What is ESG investing?

ESG investing is a growing class of investing that helps investors determine the company’s future performance based on its interactions with stakeholders and society. ESG is also referred to as sustainable investing. It looks at how companies handle non-financial performance indicators such as ethics and corporate governance.    

  • Why is it important?

In today’s age of increasing accountability, a hit to a company’s reputation can send its stock price into a downward spiral. Companies that incorporate ESG values into their functioning can reduce volatility and consequently reduce business risk. They are able to mitigate external shocks and create a very strong brand.

For an investor, this translates into:

  1. A lower frequency of shocks and risks that ensures higher cash flows and profitability.
  2. Lower chance of risk compared to the sector.
  3. Long-term planning that makes the company more competitive.
  4. Higher chance of long term profitability.
  5. Higher levels of innovation and increased efficiency.
  6. Increase in goodwill and brand image that helps in increasing premium in the markets.

Sometimes, individual investors don’t want to focus on the non-financial parameters of investing. If you are one of them, consider this. There are quite a few foreign funds, including pension funds and sovereign funds, who have invested over Rs. 1 lakh crore into Indian companies. All of them are moving their portfolio only into companies that are ESG-compliant. So you see, ESG investing has a massive financial impact on your investments too.

  • How can you determine what companies are ESG compliant?

It is quite challenging for an individual investors to identify and monitor companies on their ESG compliance levels. It is easier to invest into ESG companies via Mutual Funds. There are seven ESG Mutual Funds in India that invest in such companies:

  1. Aditya Birla Sun Life ESG Fund
  2. Axis ESG Equity Fund
  3. ICICI Prudential ESG Fund
  4. Kotak ESG Opportunities Fund
  5. Mirae Asset ESG Sectoral Leaders FoF
  6. Quantum India ESG Equity Fund
  7. SBI Magnum Equity ESG Fund

 

  • What distinguishes ESG companies from regular ones?

ESG companies care about how they make money instead of how much they make. They have a strong relationship with the community and endeavour to build better relations with all stakeholders. For instance, during the pandemic-induced lockdown, FMCG companies who follow ESG practices in India provided hospitals with health and hygiene products and helped create isolation facilities. Others provided local grocery stores with masks and sanitizers. Automobile companies manufactured ventilators and other protective equipment. Hotels offered free stay for medical care.

ESG investing is important because it means investors are putting money into companies who are reducing risk in the long-term. These companies look at the long-term sustainability of a business and the returns are likely to compound. In fact, Prime Minister Narendra Modi has said that large investors are looking at ESG companies, and that India will grow with an equal focus on ESG.

  • Do ESG companies and funds really perform better financially?

Of course they do. Take a look at the table below:

 

Index

CAGR (%)

1 yr

3 yrs

5 yrs

NIFTY 50

12.37

6.99

12.49

NIFTY 100 ESG

19.14

9.64

14.48


Source: MFI Explorer | Data as on 29th January, 2021

Historical data shows that Nifty 100 ESG has outperformed Nifty 50 benchmark.

  • Are there any questions we should keep in mind while looking at ESG investments?

You should ask three critical questions to your financial advisor on the ESG theme:

  1. Will the company/fund’s philosophy work in the long-term?
  2. Will I (the investor) be asked to sacrifice returns in the short-term?
  3. What are the performance expectations I can have of the fund?

Kotak currently recommends the following ESG funds:

  • Kotak ESG Opportunities Fund
  • Mirae Asset ESG Sector Leaders Fund of Fund

Since ESG investing is a relatively recent phenomenon in India, you should look at investing not more than 15% of your Equity portfolio into ESG funds.

Click here to invest now.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Kotak Mahindra Bank Limited, AMFI Registered Mutual Fund Distributor. AMFI Registration Number (ARN) 1390.

Click here to read the detailed disclaimer.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.