Can ESG be a strategic choice for Indian fund managers?

India’s ascendance to becoming the second-largest market for green bonds in 2020 is a seminal moment for the investment community. It is a clear indicator that ESG is no longer a fad in India but is now very much mainstream.

What is ESG? How is it working?
ESG is a part of a mutual fund that invests in companies that factors the environmental, social, and governance (ESG).

Indicative of a global trend that started in 1971 with the launch of the first-ever ‘socially responsible mutual fund’ with Pax World in the United States, sustainable investing today encompasses a bouquet of strategies. From actively divesting portfolio companies seen as harming mandating necessary annual capital infusions in entities that do measurable good (impact investing), socially responsible investing has truly come of age. According to the Global Sustainable Investment Alliance (GSIA), a joint cohort of sustainable investment organizations around the world, funds with the intent to be ‘socially responsible’ can deploy seven different investment strategies:

1. Negative/exclusionary screening (eliminating companies in industries or countries deemed objectionable)
2. Norms-based screening (eliminating companies that violate some set of norms, such as the Ten Principles of the UN Global Compact)
3. Positive/best-in-class screening (selecting companies with especially strong ESG performance)
4. Sustainability-themed investing (such as in a fund focused on access to clean water or renewable energy)
5. ESG integration (including ESG factors in fundamental analysis)
6. Active ownership (engaging deeply with portfolio companies)
7. Impact investing (looking for companies that make a positive impact on an ESG issue while still learning a market return)