ESG theme based mutual funds give up to 32% in three years. What should investors do? (2024)

ESG theme based mutual funds have offered an average return of 16.52% in the last three years, data crunching by ETMutualFunds showed. There were around 10 mutual fund schemes in the ESG theme based mutual fund category which includes both active and passive funds.

Quant ESG Equity Fund, the topper in the category, gave 31.58% return in the last three years. ICICI Prudential ESG Exclusionary Strategy Fund offered 17.40% return in the said time period. SBI ESG Exclusionary Strategy Fund gave 16.63% return in a five year period. Both these schemes follow Exclusionary Strategy after Sebi introduced five new sub-categories.

Mirae Asset Nifty 100 ESG Sector Leaders ETF and Quantum ESG Best In Class Strategy Fund gave 15% and 14.34% returns, respectively.

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“In the financial landscape, ESG (Environmental, Social, and Governance) funds have quietly made their mark. Born during the Covid era in 2020, India now boasts 11 ESG funds. These funds consistently outperformed their benchmarks and the broader market over 1-, 3- and 4-year periods,” said Shruti Jain, CSO, Arihant Capital Markets Limited.

The returns offered by ESG theme based mutual funds in other horizons such as one year and five year have always been on the lower side. What factors have affected the performance of these funds? Why are they placed on the bottom of the return chart when compared to other equity categories?

“They steer clear of sectors like energy and defence, which surged after the Ukraine-Russia conflict. It’s all about staying true to their nature. So, while ESG funds may not shout from the rooftops, their impact is felt where it matters most: sustainable growth and responsible investing,” said Shruti.

In the last one year, these ESG theme based funds have offered an average return of 34.06%. Quant ESG Equity Fund remained the topper in the said period also and offered 50.67% return. ICICI Pru ESG Exclusionary Strategy Fund gave 41.31% return in the same time period.

In the last five years, these funds gave an average return of 14.88%. Only one scheme has a performance record of five years. SBI Magnum Equity ESG Fund, the oldest scheme in the category, offered 14.88% in the last five years.

In the last one year, some equity categories such as PSU funds, infrastructure funds, small cap and mid cap funds have offered returns more than 50%. In the last five years, the other equity categories gave more than 20% return.

Does ESG theme based funds always struggle to offer better returns? “As investors grew conscious of climate risks, a slew of ESG funds launched worldwide, including a few in India. ESG funds focus on companies that rank high on their environmental, social, and governance factors. These funds have a very short performance history to make meaningful comparisons with mainstream funds or funds from other categories, which have been in existence for much longer. These funds have outperformed their benchmarks, so we cannot really say they struggle to offer better returns,” comments Jain.

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The ESG funds are benchmarked against NIFTY100 ESG - TRI and Nifty100 ESG Sector Leaders - TRI. These benchmarks gave 16.54% and 15.81% returns, respectively.

Out of these 10 ESG funds that have completed three years in the market, only three schemes have managed to outperform their respective benchmarks. In other words, seven schemes failed to bet their benchmarks.

Sebi introduced five new sub-categories for ESG investments. Earlier mutual funds were permitted to launch only one ESG scheme under the thematic category for equity schemes. In view of the industry representations for allowing multiple schemes with different ESG strategies and considering the increasing need for green financing, Sebi has decided to permit launch of multiple ESG schemes with different strategies by mutual funds.

A minimum 80% of the total assets under management (AUM) of ESG schemes should be invested in equity & equity related instruments of that particular strategy of the scheme. The remaining portion of the investment should not be in contrast to the strategy of the scheme. Mutual Funds should deploy a higher proportion of the assets towards the scheme’s strategy under the ESG theme and make suitable disclosures.

Thinking of investing in ESG funds? Wondering which sub-category to choose? And what strategy to follow while investing?

“Making ESG investments makes a lot of sense for every kind of investor. Contrary to the common belief that prioritizing ESG factors while choosing investments will negatively affect financial performance, ESG investing is a smart call. The ESG approach to investment inherently reduces your portfolio risk,” recommends Shruti.

She adds, “In the long run, well-managed ESG funds should perform well. The ESG category in India is still at a nascent stage, so one needs to take a long-term view like any equity investment. Long-term investors, who believe their money should follow their sustainable ethos and who believe companies with strong ESG score will be the winners of tomorrow should consider investing in these funds.”

ESG mutual funds invest in the stocks of companies that are environmentally and socially responsible and follow corporate governance.

We considered all regular and growth options. We considered both active and passive schemes under the category.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)