Environment, Social and Governance (ESG) based funds invest in companies that adhere to ESG policies.
These funds invest with the philosophy that if a company adheres to environmental, social and governance norms, it tends to show higher profitability, higher valuation, lower tail risks and less systematic volatility.
To short-list companies, an ESG fund usually ties up with a proxy advisory firm, which determine ESG score of different companies.
In India’s alternative investment fund (AIF) parlance, an ESG fund falls under category III AIFs.
Who invests?
The minimum ticket size for an investor who wants to deploy money in category III AIFs is Rs.1 crore. This keeps this category of funds accessible to only a handful of accredited investors.
The typical investors for these kinds of funds include sovereign wealth funds and pension funds. These investors are interested in ESG performance in emerging markets.
Structure and regulation
Since ESG funds come under category III AIFs in India, they can be open-ended or close-ended funds. If it is a close-ended fund, the minimum tenure has to be 3 years.
An ESG fund has to disclose to its investors upfront, whether it will be an open-ended fund or close ended fund.
Each scheme in this category should have a corpus of at least Rs.20 crore.
It is not mandatory for category III AIFs to make their earnings reports public at a regular time interval.
Market scenario
In India, Avendus group came up with the first ESG fund that was registered under category III AIF. The fund started its investments on February 1, 2019.
The concept of investing in companies having a sound ESG policy, though, is not limited to alternative investment funds. As a host of bellwether companies in India struggled with governance and environmental issues, asset management firms have started to look for investment opportunities in companies that have a sound ESG policy.
SBI MF has launched a scheme named SBI Magnum Equity ESG fund, an open-ended equity scheme benchmarked against Nifty 100 ESG Index.
Among other examples is Ecube. Founded by three former Tata group executives along with Quantum Advisors, ECube will soon launch a USD1 billion ESG fund.