‘ESG is a noble investment strategy that scores on performance and morals'

Investing in companies that do well on environmental, social and governance (ESG) standards is a comparatively new theme in the Indian market. We speak with Swarup Mohanty of Mirae Asset Mutual Fund to understand what it offers, how rewarding it can be, and how it has performed in overseas markets.

What is the role of ESG funds in one’s portfolio?

An ESG investor tries to achieve dual objectives, with emphasis on both, i.e., generating financial return while seeking to have a positive environmental, social and governance impact.

Following are the potential benefits that one can aim to achieve by having an ESG fund in one’s portfolio:

• The opportunity to align your investment with your values

• Globally, we have seen that in the long run, ESG funds tend to have the potential to generate higher wealth along with lower volatility

• Incentivises companies to focus not only on profit but also on planet and people

• ESG factors can be a leading indicator that may highlight any material risk that may not be evident by financial analysis

In fact, empirical studies have documented that having ESG funds has improved the overall risk–reward profile of an investor’s portfolio. Morgan Stanley analysed more than 10,000 open-end mutual funds and found out that investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is both on an absolute and a risk-adjusted basis across asset classes and over time. In its latest study on the performance of sustainable funds domiciled in Europe, which is the largest market for sustainable investing, Morningstar found out that across all categories, at least 50 per cent of sustainable funds outperformed traditional funds.

All these indicate that an ESG-theme portfolio can form part of your core portfolio as such a portfolio has an option to create wealth with lower risk in the long run. Hence, by investing in an ESG portfolio, you are not only contributing to a better tomorrow by incentivising companies to incorporate ESG practices but you are doing so with the possibility of generating comparable, if not higher, wealth with lower risk. ESG is hence a noble investment strategy that scores on performance and morals.

In India, the concept of ESG is still in its nascent stage. How do you see the theme evolving in the near to long term? Also, since ESG factors are subjective in nature and there is no standardisation in India as of now, how can an investor pick the appropriate fund?

India has consistently been one of the largest emitters of greenhouse gases and it was ranked fifth most-vulnerable country susceptible to climate change among 181 countries in the Climate Risk Index 2020 as per a report published by a German watch. In the last few years, we have seen a rise in the occurrence of floods, a rise in sea levels, increase in heatwave, water contamination, etc., which are detrimental to population and the economy. As per a study conducted by International Labour Organization, India would be the most impacted country due to heatwave as more than 50 per cent of the India’s population is employed in the agricultural sector.