ESG funds continue to see outflow; Rs 520 crore pulled out in June quarter

Sustainable or ESG (environmental, social, and governance) funds in the country witnessed an outflow of Rs 520 crore in the April-June quarter of this fiscal, according to a report by Morningstar.

The report revealed that the coronavirus pandemic led to a marked increase in investor interest and fund launches for sustainable funds globally. Image Courtesy: Reuters.

Sustainable or ESG (environmental, social, and governance) funds in the country witnessed an outflow of Rs 520 crore in the April-June quarter of this fiscal, according to a report by Morningstar. This was higher than a withdrawal of Rs 470 crore seen from such funds in the preceding quarter.

"While initial fund launches have attracted significant interest and flows, we have yet to witness continued flows for sustainable funds after their initial fund launch period. This has resulted in the lack of a discernible trend on a quarterly basis," the report noted.

Continuing the trend of outflow, the year-to-date 2023 withdrawal was at Rs 1,060 crore as compared to Rs 1,020 crore in the preceding year. This is in contrast to the infusion of Rs 1.83 lakh crore for the year to date in the overall fund market.

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The report revealed that the coronavirus pandemic led to a marked increase in investor interest and fund launches for sustainable funds globally.

"While the Indian sustainable fund market is still in its nascent state, we have witnessed a similar trend since COVID-19 with a handful of new fund launches. Since then, there have been no new fund launches in the past 24 months," the report said.

Indian sustainable fund assets have stagnated around the Rs 10,000-12,000 crore range given the lack of new fund launches in the past 24 months. The sustainable fund assets were at Rs 11,040 crore as on June 2023, representing a marginal 1.9 per cent increase from a year ago, the report mentioned.

With only 11 sustainable funds, the Indian market is quite concentrated. The top five sustainable funds account for 87 per cent of overall sustainable fund assets, with the largest fund -- SBI Magnum Equity ESG strategy -- which is also the oldest sustainable fund, accounting for 45 per cent of overall sustainable assets.

Currently there are eight actively managed sustainable funds; one passive environmental, social, and governance exchange-traded fund/fund of funds; and two global sustainable feeder funds. Interestingly, active funds account for 97 per cent of overall sustainable fund assets.

Over the past few years, capital markets regulator Sebi announced sustainability disclosure norms, also known as the Business Responsibility Sustainability Reporting, or BRSR guidelines, for listed companies. These guidelines make it compulsory for the top 1,000 listed firms to make sustainability disclosures.

In a recent regulation, Sebi has looked to boost these disclosures by announcing a set of key indicators, also known as BRSR Core, on which companies are expected to provide reasonable assurance.

Sebi's ESG guidelines will improve the quality and credibility of ESG disclosures and ratings in India, and promote a culture of responsible business conduct among the corporate sector, Tejas Khoday, Co-Founder and CEO of FYERS, said.

In addition, to avoid greenwashing, the regulator has also outlined disclosures for sustainable funds along with defined fund categories with specific sustainable approaches.

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