Does it make sense to invest in ESG-themed funds in India?

ESG funds limit investing universe of fund managers

You take money that can be invested into any company the fund manager believes will generate superior returns and force it into only a smaller set of companies that pass through a particular filter.

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In a market like India, it may not make much sense as returns making may not be higher

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Investors usually want three benefits from a financial product—utilitarian benefits (returns), expressive benefits (their values, tastes and status to others) and emotional benefits. While rationality would suggest that investors should only target utilitarian benefits, investors often want expressive and emotional benefits as well.
In my opinion, the ESG funds cater to the emotional benefits and, to a certain extent, the expressive benefits.

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I’m sorry but can someone tell me whats ESG and how does it impact investing?

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The increasingly popular ESG investing style evaluates a company’s environmental, social and governance factors alongside traditional financial metrics. It’s become a buzzword on the Street as companies face growing pressure from governing bodies and investors alike to provide more transparency around their operations.
I personally don’t support it as Scoring a company on these metrics is inherently subjective.

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Totally agree with @Aayushi. Yes they’re very subjective. In fact, its is a great marketing tool at the moment in foreign lands. There’s a lot of sizzle but no steak.

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I agree with @Jiten.
Chamath Palihapitiya in an interview with CNBC told that ESG investing is a complete fraud and “If you paint yourself as ESG in Europe, you can essentially borrow money from the ECB at negative rates,” and companies like JP Morgan are using this to their advantage by making public statements that they won’t finance fossil fuels.

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But the Nifty 100 ESG Index, which was designed to reflect the performance of companies within Nifty 100 index based on the ESG score, has outperformed its parent index Nifty 100 across various timeframes.

What do you have to say about this? @Jiten @Aayushi

Over what period? I see our performance always over a consistent period of 5 yrs minimum to make any sense.

I meant out performance

As we see a trend towards responsible returns from investing, ESG has entered India lately. We have 3 funds currently and not a big history of track record. Would be interesting to see how they work out, earlier this year they have seen good inflows. Read this

And how they balance out investor expectations of maximum return.

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There are intangible impact costs that the company invariably bears for not being ESG-compliant—be it costs associated with environmental damage or governance factors around management integrity. This, in turn, impacts investors’ returns. Considering all these factors, I expect ESG to become a core part of investors’ long-term equity allocation.