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ESG Funds – Types and Performance Compared to Nifty 50

While ESG leaders deserve acclaim, should perceived “ESG disruptors” be viewed with outright skepticism? Isn’t it unfair to label certain industries with a flippant term like anti-ESG? Read here

Our definition of sustainable enterprises may deserve a reassessment. Environmental, social and governance (ESG) principles cannot be judged with a moral compass, nor lend themselves to rigid classifications such as good and bad ESG actions.

Saints versus sinners, ethical versus corrupt, mainstream ESG coverage coalesces around these themes. Investors and market analysts seem to share their polarized interpretations of ESG.

While ESG leaders deserve acclaim, should perceived “ESG disruptors” be viewed with outright skepticism? Isn’t it unfair to label certain industries with a flippant term like anti-ESG?

We have to be careful not to take a hard-line “either you’re with ESG or you’re against” approach. At some level, the ESG can become a tactile complex. For example, how do we define stocks of sin?

It’s a gray area if you assess sectors like defence. For a long time, ammunition and defense equipment were mentioned among the stocks of sins and were even absurdly compartmentalized in the same category as alcohol, gambling and tobacco. How can an industry associated with national security be considered a sin?

Additionally, several “sinful” stocks are still in demand, generating profits during economic downturns and rewarding investors with bonuses.

Analysts cite another interesting example of corporate carbon intensity. An organization can reduce carbon emissions in manufacturing without controlling emissions from its products and the supply chain as a whole.

Similarly, an industry specializing in the manufacture of concentrated slabs will have a high environmental impact, which is inevitable.

As they say, “just one ESG data point” may not give an accurate result of a company’s true ESG efforts.

ESG activists can throw darts at tobacco and alcohol manufacturers, but adults, aware of the warnings associated with these products, exercise their agency. Sin, as they say, is a relative term. Even the best ESG-focused industries might not solve climate and environmental issues. On this point, there is no better analogy than electric cars which are taking over diesel vehicles and rightly so. That said, lithium and cobalt, used in electric vehicles, are not necessarily environmentally friendly, as they are extracted using mining techniques.

This shows how broad ESG is – different industries depend on different resources.

There is a methodology identified by ESGrisk.ai to classify companies in the polluting category based on the CPCB red, orange, green and white categories, which are based on the pollution index. Red being the most polluting category with a pollution index of 60 and more. In this context, industries in the red category can be recognized as dirty sectors.

Interestingly, 18% of the top 50 ESG companies belong to this red category or the so-called dirty sector according to the CPCB. Moreover, these top 50 ESG companies with a significant share of the dirty sector are part of most ESG funds.

Some ESG funds:

Performance of ESG funds compared to Nifty 50

3-year review (01/31/19 – 03/31/22) 2-year review (04/01/20 – 03/31/22) Return over 1 year (04/01/21 – 03/31/22)
50 smart returns* 76.75% 106.86% 21.20%
Performances of the 50 best ESG performers according to ESGRisk.ai** 85.30% 127.93% 21.38%
*Equally weighted**Based on FY21 ESG data

ESG funds beat the Nifty 50 in one year and two years back

Companies should be analyzed on demonstrable ESG progress rather than how history perceives them. Environmentalists, for example, dissect the ESG efforts of traditional sectors like oil and coal and often critically evaluate them. Like coal and petroleum, petroleum, atomic energy, electricity, and steel feature prominently in public sector units (PSUs). Unfortunately, UAPs counteract the negative perception regarding their adherence to ESG due to their presence in these sectors.

In a way, PSU’s compliance with the environmental part of the ESG is considered suspect. The fact is that UAPs are gradually moving the needle on the ESG aspects of their businesses. Recent research by ESGRisk.ai across 539 private sectors and 64 PSUs found that public sector units also outperformed their private counterparts in employee development and biodiversity.

Several Indian UAPs are moving decisively towards solar energy, reducing carbon emissions and demonstrating an unwavering ESG commitment. Even as institutional investors and stakeholders demand greater ESG responsibility across sectors, Indian PSUs are growing alongside to meet their needs.

Coal India Ltd has already shown the way by closing its small mines. Bharat Petroleum has collaborated with the Solar Energy Corporation of India Limited to explore opportunities in the field of renewable energy. Indian Oil has announced its intention to have green hydrogen to support its decarbonization efforts.

Let’s not forget, PSUs remain the nation’s primary source of power generation – they must balance age-old generation systems with sustainable alternatives before making a full transition to green power.

Several Indian PSUs are already developing decarbonization roadmaps, which should improve their ESG ratings and win the trust of private investors.

While private sectors may still enjoy an advantage over PSUs on the important issue of greenhouse gas emissions, the difference between the ESG scores of the two, which is not glaring, is expected to narrow over time. .

Lower levels of voluntary disclosures may have contributed to the difference. This could change with the Corporate Responsibility and Sustainability Report (BRSR) bringing dynamic changes to ESG disclosures.

PSUs should be assessed with ESG frameworks, not through the smoky prism of subjectivity. Activism, sentimentality and hysteria have no place in unbiased ESG analysis.

ESG models should not serve as a jury; instead, they are intended to eradicate subjective claims to arrive at objective options. Their role is not to judge but to measure. These models cannot predict weather hazards, but can certainly use analytics to gauge whether a business is equipped to survive unforeseen weather events.

So let’s suspend our judgment on PSUs. Going forward, they could lead India’s ESG journey.

The author, Sankar Chakraborti, is Chairman of ESGrisk.ai and CEO of Acuité Group

First post: STI