The evolution of investment has transformed the economy and redefined long-term investment horizons. Sustainable investment, focusing on environmental, social, and corporate governance (ESG), offers a promising path for long-term investing, instilling confidence and security in our investment choices. India has been a bystander to the operation of the ESG framework. However, the recent G20 summit, a platform where global leaders come together to advocate for sustainable goals, has reassured commitment and outlined steps to support sustainable investment.
The driving force for sustainable funds is reducing exposure to risks associated with environmental disasters, consumer demands, regulatory initiatives, the inflow of capital, and long-term sustainable growth. In 2024, the world witnessed adverse climatic challenges threatening human existence; heavy rains caused floods in the United Arab Emirates, Hong Kong was hit by nearly 10,000 lightning strikes overnight, Japan witnessed the worst earthquake disaster while chronic heat waves troubled India. All these scenarios hint at the adoptive sustainability measures so that investors will gain traction for ethical investing through ESG funds due to long-term growth and stability prospects.
Despite the regulatory push and regular awareness about the green economy and climate risks, sustainable funds have faced significant challenges in India, leading to underperformance. However, it has come back on track with initiatives by industry, regulators, and policymakers to define sustainable investments better. Looking at the current investment dynamic, performance investing and sustainable funds will continue to grow in 2024 as investors aim to align their portfolios with their values. As of March 2022, the asset value of ESG-focused funds in India rose to around Rs. 124 billion. This starkly rose from over $22 billion in 2019 (Statistica).
The Russian-Ukraine War sparked a global rally in defence stocks, challenging ESG investing. The spike in energy prices has redirected investors’ interest in progressive sector companies like oil, gas, and fossil fuel stocks. If we look at traditional ESG portfolios, these progressive stocks were never included and have remained underperforming for decades. However, ethical investing trends are rolling into investors’ portfolios in light of resource depletion and other substantial challenges for the countries.
By asset class, sustainable equity funds performed best, with median returns of 16.7% for the full year, outpacing the 14.4% realised by traditional equity funds (Morgan Stanley). ESG funds have been expanding in India dominantly for the mutual fund sector and Asset Management Companies (AMC) with the launch of equity schemes and Exchange Traded Funds (ETFs). Also, enhancing ESG disclosure will aid fund managers in accessing authentic information and making better investment decisions. Greenwashing persuades companies to be inclined towards framing rules to limit false advertising and present the right information to spread sustainability awareness and garner consumer confidence.
SEBI has allowed multiple equity schemes under the ESG category; for instance, SBI Magnum Global Fund, Aditya Birla Sun Life Advantage Fund, and Franklin Build India Fund, which strategically shift investor portfolios to focus on the theme of low carbon, green transport, renewable energy, and environmental protection. Companies in sustainable funds tend to focus on long-term growth avenues that might deviate active investors who are targeting short-term gain. Based on a CRISIL report, the sectoral composition of sustainable funds constitutes 27.67% (lending), 16.39% (IT), and the rest of other miscellaneous contributors like Auto OEM, industrial, FMCG, consumer retail, etc. India and other global countries can pave the way for sustainable financial growth with an inclination towards ethical investing.
Globalisation and growth with environmental degradation will ultimately undermine the economy. Sustainable investing might look like a new concept; however, it has deep roots way back to 1971, when Pax World launched the first sustainable mutual fund by two United Methodist ministers—Luther Tyson and Jack Corbett. Seeking to avoid investing church funds in companies involved in the Vietnam War, they established the pioneering Pax World fund. The idea was to align their investments with high values and urge companies to adhere to social and environmental responsibility standards. However, given the current dynamic investment trend, performance investing and sustainable funds will continue to grow in 2024 as investors aim to align their portfolios with their values.
