Nifty100 ESG underperforms Nifty so far this year

Analysts say the underperformance of the Nifty100 ESG index is due to poor returns on IT stocks like Tata Consultancy Services, Infosys, HCL Technologies and Wipro and financial heavyweights including the HDFC twins and Kotak Mahindra Bank

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After posting positive returns for six consecutive years, India’s Nifty100 ESG Index has turned negative so far this year, underperforming the benchmark Nifty Index of the National Stock Exchange.

Year to date, the Nifty 50 index has risen nearly 5 percent so far this year while the Nifty100 ESG index lost over 2 percent. In the last one year, the Nifty100 ESG index fell over 5 percent compared to a 1.4 percent rise in the Nifty index. The Nifty 100 ESG index posted positive returns for six straight years. In 2021, it advanced nearly 31 percent while in 2020, it gained 22 percent.

NIFTY100 ESG Index is designed to reflect the performance of companies within the NIFTY 100 index, based on Environmental, Social and Governance (ESG) scores. The weight of each constituent in the index is tilted based on the ESG score assigned to the company. The constituent weight is derived from its free float market capitalization and ESG score.

Post-Covid, many investors in India have turned more conscious of the ESG theme when it comes to companies. To take advantage of the increasing awareness, many mutual fund houses have launched schemes on this concept.

Aditya Birla SL ESG Fund, Axis ESG Equity Fund, ICICI Pru ESG Fund, Invesco India ESG Equity Fund, Kotak ESG Opportunities Fund, Mirae Asset Nifty 100 ESG Sector Leaders ETF, Quantum India ESG Equity Fund and SBI Magnum Equity ESG Fund are some examples.

Energy crisis, poor returns on IT stocks

“The Nifty ESG index has high weights in financial services and information technology (IT). While financial services stocks have done well, IT has underperformed year-to-date (YTD) for reasons known to all. Funds that were following ESG norms have underperformed lately due to lack of energy stocks in their portfolio” said Deepak Jasani, Head of Retail Research, HDFC Securities.

Analysts say the underperformance in the Nifty100 ESG index was mainly due to poor returns on IT stocks like Tata Consultancy Services (TCS), Infosys, HCL Technologies, Wipro and the financial heavyweights including the HDFC twins and Kotak Mahindra Bank. YTD, the BSE IT index has fallen nearly 21 percent.

“This has impacted performance of ESG indices. Global concerns are impacting IT spending. The United States economy is more or less stable but the Eurozone is still a concern. So the ESG index is under-performing. Not that we have totally forgotten COVID and important lessons (from the pandemic). Global situation will improve going forward, and again ESG may show a better performance,” said Kamlesh Shah, President, Association of National Exchanges Members of India (ANMI).

Both non-ESG stocks, Coal India and ITC, have become the best performing stocks this year with a return of 75 percent and 62 percent respectively. Comparatively, HDFC Bank and Kotak Mahindra Bank, two of the largest constituents of Nifty ESG index, have risen by just 7 percent each while Housing Development Finance Corporation (HDFC) gained 2 percent.

“The superior performance of these two stocks (Coal India and ITC) which form part of Nifty but not Nifty ESG have tilted the performance in favour of Nifty. Globally also, the fascination for ESG stocks has declined a bit,” said VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Gaining momentum

There are nine domestic ESG based mutual funds in India and most of them have a track record of less than three years. Assets under management (AUM) of the ESG funds was nearly doubled in the last two years to Rs. 11,133 crore in October 2022. Among these funds, SBI Magnum Equity ESG Fund holds the largest share of 42 percent of the overall AUM.

ESG is slowly picking up momentum with rising awareness among the investors globally and investment in ESG themes is also rising steadily. However, companies’ growing focus on ESG and sustainability always increases their costs initially, impacting returns to some extent, leading to lower return ratios compared to other companies, analysts said. What makes matters worse for ESG-focussed funds here in India is that investors largely aren’t bothered about whether a mutual fund focuses on ESG or non-ESG stocks. Here in India- and also historically-returns matter more than other things.

“During COVID-19, investors were more concerned about environment and sustainability resulting in increasing preference towards ESG-focused stocks, while in normalised situations, high growth and high return stocks become a preference over ESG-focused stocks among many of the investors. This led to Nifty’s outperformance over Nifty ESG. Moreover, due to the energy crisis in the last six months, cost of sustainability has increased and companies depending on greener fuels suffered on the cost front, which would be an additional blow to these companies”, said Mitul Shah, Head of Research, Reliance Securities.

(Dhuraivel Gunasekaran contributed this story)