Are Indian ESG Funds Sustainable?

Abstract

Mutual funds are the entities or investment vehicles which pool investment of various investors to invest in the securities which achieve the overall objective of the risk and return laid out under their mutual fund scheme or Investment policy statement of the said scheme. A portfolio manager would determine the risk and return of any stock or asset under consideration before investing in any funds. They would compute measures that account for risk, like Jensens' Alpha (Jensen, 1968), Treynor's Ratio (Treynor, 1968), and Sharpe Ratio (Sharpe, 1966) to assess target asset's performance in terms of their capacity to choose stocks and assets and to time the market.

Those mutual funds, which prioritise their investments on the basis of either environmental factors or factors affecting the society and governance issues of the company are known as ESG funds. Hereinafter, these core factors are referred to as “3 core factors”. ESG funds operate with the aim of pushing invested organisations towards better and sustainable governance with an improved environment to benefit future generations of humans. It thus combines the fundamentals of investment and performance evaluation approaches with a major emphasis on issues concerning the society, its surrounding environment and the corporate governance issues of the legal entities.

Through the paper we evaluate the performance of ESG funds in India compared with Indian stock market and growth of the Indian ESG funds as reflected in its Average Assets under Management (AAUM). The paper further evaluates if there is a burden of these three core factors on the performance of aforementioned funds and is it real or illusory.