Increasing consciousness about sustainable investing continues to fuel appetite for environmental social governance (ESG) funds among global investors. Nearly 80% of individual investors want to invest in these funds for financial returns and a positive environmental impact, showed a Morgan Stanley survey. Among them, millennial investors formed a large chunk.

Graphic by Santosh Kumar Sharma/Mint
Graphic by Santosh Kumar Sharma/Mint


The weekly fund flows data published by EPFR Global Navigator reflects the rising popularity of this product. In this calendar year so far, ESG or socially responsible investing (SRI) funds attracted inflows of over $35 billion. Both ESG equity and bond funds saw fresh inflows for the 42nd straight week, EPFR’s newsletter dated 25 October said. On the other hand, equity funds overall have posted net outflows of over $225 billion so far in 2019, for the funds tracked by EPFR.

ESG funds basically focus on investing in companies that meet high environmental, social and governance standards. Globally listed ESG funds have grown at a fast pace, with ESG equity funds touching $560 billion in 2019. However, analysts say although investors are flocking towards ESG funds, they are at a nascent stage in India and globally. So, there are challenges with respect to measuring their performance and returns compared to traditional products, they added.

“Despite the lack of consistent evidence of outperformance of sustainable investing strategies, investor interest in ESG factors has continued to rise in recent years," the International Monetary Fund (IMF) said.

IMF’s latest Global Financial Stability report said although assets controlled by ESG funds are still smaller than mainstream investment funds, they are rising fast. As the chart alongside shows, listed ESG funds are currently controlling some $850 billion in assets—less than 2% of the total investment fund universe.

Even though the popularity of ESG funds is on the rise, there are some challenges, which investors shouldn’t overlook.

For instance, the fees for managing ESG funds are often higher than those of other active funds. Secondly, ESG-related disclosure remains fragmented and sparse, the IMF said.

“Indices that track assets based on ESG criteria have opened the market to passive investors, but further fund and asset standardization may be needed to match investor expectations regarding ESG compliance," added the IMF report.

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