Are ESG funds good for three-five years' investment? If one already has SIP running in three-five equity funds, would you advise investing in them?
- Virendra Kumar Gupta
The first thing I'd like to point out is, I don't think three-five years is a sufficient time horizon to build an all-equity portfolio. So one should consider investing only a part of his money in equities while the rest of the money should be in debt.
Now coming to ESG as a theme for investing. ESG has been gaining a lot of prominence globally. Many global institutional investors consider ESG factors a part of their investment research and selection process and do not consider ESG a standalone theme. The advocates of ESG build its case around two-three key dimensions. Firstly, ESG is looked at as a contribution towards a bigger cause because by investing in ESG-compliant companies, investors look at it as one of the ways in which they can give back to society and the environment. Furthermore, the advocates of ESG also propose that given that a lot of global institutional investors have started looking favourably towards ESG-compliant companies, it is generally easier for them to raise capital. Hence, their cost of capital tends to be lower, and there are fewer chances of a regulatory backlash. All these factors together contribute towards building a case for ESG-compliant companies. Going forward, as there is greater realisation towards responsible investing, probably the tailwinds for ESG will only get stronger from here on.
The next issue is whether ESG funds offer a unique investment proposition. Well, maybe not. Refer to the graph 'ESG vis-à-vis flexi caps.' We compared the underlying portfolios of the few ESG funds available in India with those of the mainstream flexi-cap funds (erstwhile multi-caps), which the same fund houses have to offer. What we found was that there is a fair degree of overlap between the stock holdings of ESG funds versus the mainstream flexi-cap funds. Thus, the broad point is, even by investing in the vanilla flexi-cap funds, you are already getting a strong ESG flavour in your portfolios at the moment. Hence, for now, a more prudent way could be to wait and watch for the ESG theme to evolve more thoroughly and maybe then take a call on whether or not there is a strong investment case for a standalone ESG fund in your portfolio.
This article was originally published on July 14, 2021.
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