ESG (Environmental, Social Governance) investing has been all the craze lately with woke investors scouring the markets for funds with this tag, entailing a certain level of accountability, showing the middle finger to this capitalistic world.
After all, a lot of us want to do our bit in making the world a better place. We change how we eat, travel, and even buy. Extending this to investing sounds like a fair deal.
Unfortunately, it might not be as straight-forward as we think. These funds maybe doing a good job at selecting some of the more sustainable businesses out there, but you’re investing to also make a decent return. And that’s where ESG mutual funds may not be that good an idea.
Why Do We Say That?
All the top ESG funds (by AUM) out there have at least 30% (on the lower end) of funds invested in IT and Finance stocks. To our surprise, most of these funds have literally hit CTRL+C and CTRL+V when it comes to what’s in them.
Take a look for yourself, if you invest in the top 5 ESG mutual funds, more than 50% of your money goes to the same stocks.
The point is all ESG funds are doing the same thing. This obviously makes their returns very similar.
Why Does This Happen?
Most funds use something called ESG ratings to determine where and how much to invest. So if a company scores high on an ESG rating, funds would invest a larger amount in the stock.
Since everyone follows almost the same methodology, they end up with the same stocks, and similar returns.
Take the Nifty 100 ESG index for example. The index is made up of Nifty 100 stocks, but the weights are tilted according to the ESG score of these stocks. The performance Nifty ESG 100 has been no different compared to Nifty 100 over the last ten years.
What to Do Then?
Invest in a portfolio that invests in sustainable businesses, but that also focuses on making you a decent return.
Rupeeting’s Socially Responsible Investing (SRI) is a core ESG portfolio, hence the name. How is it different?
We focus on making money
We do that by investing in sustainable businesses
We do take ESG ratings into consideration, but we don't mark our weightage to them
We take positions even in stocks beyond the Nifty 100, where we see pockets of good ESG practices
We continue focusing on superior stock picking, but of course with the additional constraint of sustainability
And the result? Well, the fund is new. But over the last three months, returns on the portfolio have been 22% versus 14% for Nifty 50.
And the constituents? Not at all like the top 30 same-same stocks of ESG mutual funds. Want to know some?
A renewable glass manufacturer
A large private bank and a large IT company (of course)
A life insurance company
A company that has actively made newer chemicals with lower emissions
A power company focused on going the renewable way
And some more!
Go on, invest sustainably, but also make money!