ESG funds: Appropriate for cautious, long-term investors

High largecap exposure led to underperformance vis-à-vis multicap funds

- SARBAJEET K SEN

Though the Environmental, Social, and Governance (ESG) fund category has given a reasonably decent category average return of 32.4 per cent for the year ended February 28, 2024, it has underperformed diversified equity categories. Flexicap schemes have given 36.9 per cent while multicap schemes have given 44.7 per cent over the same period. Should investors avoid these funds after this recent spell of underperformance?

As of January 3, 2024, 10 ESG schemes across various fund houses were managing assets worth ₹10,946 crore. One of these schemes - Mirae Asset Nifty100 ESG Sector Leaders Exchange Traded Fund (ETF)-is passively managed.

Where do they invest?

ESG-based investing aims to identify businesses that score high on sustainability. Businesses such as liquor, tobacco, and gambling are excluded.

"ESG portfolios generally tend to have companies with robust corporate governance and are conscious of the social and environmental impact of their manufacturing or business practices," says Mittul Kalawadia, senior fund manager, ICICI Prudential Mutual Fund.

Reasons for underperformance