ESG funds lose their sheen

Aug 16, 2023

Sustainable funds attracted significant interest and flows during the pandemic. We are yet to witness continuing flows into this category after the initial fund launch period.

Sustainable Funds: What are they?

The Indian sustainable fund universe encompasses open-end funds, exchange-traded funds, feeder funds, and funds of funds that, by prospectus or other regulatory filings, claim to focus on sustainability; impact; or environmental, social, and governance (ESG) factors.

Our sustainable fund universe does not contain the growing number of funds often referred to as "ESG integrated funds," which formally consider ESG criteria in the investment process and engage with portfolio holdings but do not make ESG considerations the focus of the investment process.

Furthermore, the global sustainable fund universe doesn't include funds that employ limited exclusionary screens such as controversial weapons, tobacco, and thermal coal (combined with an ESG integration approach or not). We however include ESG-screened passive funds as, typically for these, the exclusions are the sole purpose of the strategy.

To identify sustainable funds in their respective regions, manager research analysts use the "Sustainable Investment–Overall" data point in Morningstar Direct.

Sustainable Funds: Flows

Retail assets in Indian sustainable funds were Rs 110.4 billion on June 30, 2023, a 1.9% increase compared with June 30, 2022 (Rs 108 billion).

YTD, the overall fund market has seen inflows of Rs 1,830 billion. But YTD outflows in Indian sustainable funds were estimated at Rs 10.6 billion, continuing the trend of outflows witnessed last year to the tune of Rs 10.2 billion.

YTD is year-to-date as on June 30, 2023

Sustainable Funds: NFOs

There have been no new fund offers over the past two years. This comes after witnessing a handful of sustainable fund launches in 2020.

Sustainable Funds: Number of Funds and Assets Under Management

  • Currently, there are only 11 sustainable funds: 8 actively managed, 1 passive (ETF/FoF), 2 global feeder funds
  • Active funds account for 97% of the assets
  • The top 5 account for 87% of the assets, with the largest fund accounting for 45% of the assets

Domestic Indian equity sustainable funds rate 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% of the overall sustainable funds by assets have 5-globe ratings.

Sustainable Funds: Regulatory Update

Over the past few years, the Securities Exchange Board of India (SEBI) announced sustainability disclosure norms, known as the Business Responsibility Sustainability Reporting (BRSR), for listed companies. These guidelines make it compulsory for the top 1,000 listed companies to make sustainability disclosures.

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

  1. Exclusion
  2. Integration
  3. Best-in-class and positive screening
  4. Impact investing
  5. Sustainable objectives
  6. Transition of 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.

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Aravind Sankeerth
Aug 16 2023 04:37 PM
ESG is an investment philosophy of people and about being ethical to the world we live in.

That is not a sound financial tool and that is proved by the selective stocks that are picked in the name of ESG

The portfolio/ the nature of playing the ESG game and finally the whole process of defining investments through ESG is flawed and this keeps happening from time to time. Sharia/ESG/Ethical Fund and so on
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