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There would be a Rs 315 crore outflow from sustainable funds in FY22

Experts predict that ESG concerns will become an intrinsic element of asset managers' entire investment strategy in India in the future.
There would be a Rs 315 crore outflow from sustainable funds in FY22

Investors are yet to warm up to the notion of sustainable investment, with outflows of Rs 315 crore from sustainable or ESG (environmental, social, and governance) funds in India in 2021-22. This follows a massive influx of Rs 4,884 crore in the fiscal year 2020-21. According to Morningstar India's data, approximately Rs 2,000 crore was invested in sustainable funds prior to that.

According to Kaustubh Belapurkar, Director - Manager Research, Morningstar India, most flows into sustainable funds have come in during the new fund offer (NFO) season, and the 2020-21 financial year saw considerable inflows due to multiple ESG fund launches. Markets are now turbulent, and movements across asset classes are influenced by both macro and micro factors, according to Nakul Zaveri, Managing Partner of Relativity Investment Advisors.

Sustainable funds invest in renewable energy, low-carbon energy, green transportation, and environmental preservation. Globally, flows into sustainable funds are accelerating, with assets in sustainable funds totaling more than USD 2.7 trillion as of December 2021. In terms of ESG, it's still early in India, but with the development of ESG funds in recent years, investors now have investable choices, according to Belapurkar.

Sebi, the capital markets regulator, is aiming to develop legislation surrounding sustainable investment and disclosures, recognising the increased interest in sustainable investing throughout the world. In January, the regulator issued a consultation document for ESG rating providers for securities markets, asking for public feedback. After taking into account the opinions of all stakeholders, Sebi will draught the final regulation.

Asset management companies (AMCs) have started developing equity schemes in the ESG arena under the thematic category, and ESG funds are increasing in the Indian mutual fund business. In the ESG arena, the AMCs are also establishing exchange traded funds (ETFs) and ETF fund of funds. There are now 12 ESG-themed mutual fund schemes in India, with assets under management totaling over Rs 13,000 crore.

Credit agencies (CRAs) and researchers with a minimum net worth of Rs 10 crore would be eligible to be authorised as ESG ratings providers or ERP, according to the consultation document. Analysts claim index funds and exchange-traded funds (ETFs) are the other topics gaining popularity among the country's mutual fund businesses, in addition to ESG funds.