The Securities & Exchange Board of India (SEBI) recently announced a slew of measures to boost investor confidence in mutual funds. Apart from increasing the role and responsibility of trustees and increasing focus on investor protection, SEBI has stressed ESG-based investing in India. The market watchdog has allowed fund houses to launch more than one ESG scheme from now on. Earlier, the fund houses were mandated to have only one scheme per category.

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ESG funds are still in a nascent stage in the Indian market and this move is set to encourage ESG investing in India. Mutual funds are expected to file for multiple ESG schemes with various investment strategies. At the moment there are a total of 10 ESG funds in the market, a number far lower than the global peers. The 10 funds currently operational in India manage a total AUM of Rs 10,243 crore as on March 29, 2023. Most of these schemes track the NIFTY 100 ESG TRI which has a total of 89 companies listed on it- a far lower number than the general indices.

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When it comes to top performers in the last three years, Quantum India ESG Fund with 26.98% returns and SBI Magnum Equity ESG fund with 24.42% returns has topped the return charts.

ESG compliance is not mainstream in many mid and small-sized companies in India yet and hence the universe for the schemes is smaller and more concentrated. Nifty100 ESG Index is designed to reflect the performance of companies within the Nifty 100 index based on the Environmental, Social and Governance (ESG) risk scores. The weight of each constituent in the index is tilted based on the ESG risk score assigned to the company, i.e. the constituent weight is derived from its free-float market capitalisation and modified ESG risk score.

The average stocks in the portfolios of existing ESG schemes are 38-52, compared to 70-100 in a diversified equity portfolio. In India, the top constituents by weightage in the ESG index are companies like Infosys, Tata Consultancy Services, HDFC Ltd, HCL Technologies, ICICI Bank and Bharti Airtel. Financial Services with 29.37, Information Technology with 23.05% and Automobile and Auto Components with 10.76% represent the biggest sectors on the index.

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On the return side, in the last one year, the category has offered an average return of -5.09%. In a three-year time frame, the category has offered 21.79% and in five years, the returns stand at 11.01%. The decline in returns can be attributed to the energy crisis and a global hit on the ESG framework after the Russia-Ukraine war.

In a scenario like this, where only 89 stocks form the only major ESG index, more ESG funds will have to struggle for stock selection.

(Edited by : Priyanka Deshpande)