It’s time to usher in ESG scoring for mutual funds

The soaring popularity of environmental, social and governance (ESG) funds in recent years presents a compelling case for adding ESG fund scoring for the fund management industry in India.

There has been a surge in sustainable assets globally, especially in the United States (US), where nearly 33%, or $17.1 trillion of the total $51.4 trillion assets under management (AUM) as of 2020, was in this segment.

Pension funds had the lion’s share of this, with nearly $6.2 trillion of their assets in the US as of 2020 being in the ESG space. Mutual funds incorporating ESG criteria in their investment strategy totalled up another $3.1 trillion.

Back home, it is only recently that such funds have gained currency. The combined AUM of the 10 ESG funds currently in operation was Rs 11,818 crore as on March 31, 2022 (excluding fund of funds), having risen five-fold over the past three years. As many as seven of these were incepted in fiscal 2021.

The growth is being driven by special investment vehicles in the ESG segment and increasing preference of underlying companies for a sustainable, long-term approach to growth, which is adding to the share of sustainable assets managed by mutual funds.

Widespread adoption of ESG scoring by mutual funds at this stage will add much-needed grist to the mill by increasing transparency and trust.

After all, mitigating ESG risks is right in the lane of prudent investment management as it involves identification of companies with sustainable practices that can create a buffer for them across the three parameters, thereby improving their long-term value proposition.

These factors improve disclosures in the space among companies and also foster a stewardship code between investors and investee companies that protects shareholders.