The Unsettling Reality of ESG Investing

In September 2015, the US Environmental Protection Agency exposed Volkswagen for installing software in their diesel-powered cars, enabling them to deceive EPA emissions tests. Termed "Dieselgate," this scandal became the costliest in automotive history, exceeding USD 30 billion in fines and damages. The fallout raised doubts about the survival of the 80-year-old industry leader. This incident underscores the significance of environmental, social, and governance (ESG) investing. Globally, there has been a surge in ESG funds, particularly in the United States, where nearly one-third of total assets under management are in this segment, primarily led by pension funds. 

However, the performance of ESG funds has been less than stellar, both in India and globally. A study reveals that while highly-rated sustainability funds attracted more capital, none outperformed the lowest-rated funds. Moreover, companies in ESG portfolios exhibited poorer compliance records for labour and environmental regulations. Interestingly, the inclusion of companies in ESG portfolios did not lead to subsequent improvements in compliance. 

In India, despite initial enthusiasm, investors are turning away from ESG thematic funds due to underperformance compared to category (thematic) averages. Our cover story in this issue delves into the performance of ESG funds in terms of risk and return. If prioritizing ESG performance over financial returns aligns with your investment goals, continuing with this category may be a viable choice. 

With wide-ranging topics covered with insightful special reports, we hope this edition provides readers with the right mutual fund investment guidance. 

Shashikant Singh
Executive Editor