The year 2020 will be remembered not only over the next 100 year for Covid-19 and other factors but also for the birth of ESG based investment vehicle. We ended the year with ESG NFOs where pretty significant amount have been collected. According to me in the coming 2021, we should not be surprised with ESG Index-based options by BSE or NSE being floated. Yes ESG index will be there for investors and AMCs will come up with ESG Index Fund as currently prevailing in developed markets. By the time you all will be reading this SGX might have launched the New Sustainability The platform, Plans New ESG Products.
The same ESG index will be the benchmark for the said investment themes. Over $80 billion flowed into global sustainable funds in the third quarter of 2020, an increase of 14% in the second quarter,. Assets under management climbed 19% to a fresh high of $1.23 trillion. The bulk of flows came from European investors, but net inflows were also seen in the United States, Canada, Australia and New Zealand, Japan, and the rest of Asia. Well, we witnessed ESG Equity funds and now in 2021 don't be surprised if we get ESG Fixed Income products. ESG fixed income will be an interesting watch particularly in countries like India and China where defaults and shadow business models live. The negative yield debt product stands around $12 trillion and we will witness these new products to pull out funds from the negative yields into these newly formed ESG Fixed Income products. The new ESG ETF 2020 data as mentioned below
ESG Index and ESG ETF do not need any introduction but we need to know how this segment will be a larger bucket compared to any other historic ones. ESG ETF assets in Europe have exploded this year with investors piling €22bn into these strategies so far this year, as at the end of October. This product segment will be very soon a part of asset allocation models. The reason being awareness of the people and change of the business culture going ahead raises the demand for ESG investment themes.
ESG ratings will be coming up soon in India where ESG grouped companies will have different rating compared to the traditional ratings. This help to identify the new entrants to the ESG club and then taking bets on them. The new ratings of ESG and its benchmark will help to identify those Companies which does not engage meaningfully with ESG issues will be excluded from indices, and as more cash gets placed into the funds which are created to track those indices, the outcome will be share price underperformance relative to those stocks which do pay attention to ESG considerations.
ESG will be the next multi cap or diversified equity fund in India as well to the global investor community. In the coming few years the size of the same will be larger enough to manage. This the prime reason why I told that it should be part of the asset allocation model and ESG has a long way to go.
ESG basket of investment and financial opportunities will bring fresh air to the investment world. The Global markets are simply converting their existing index funds into ESG and trimming the unnecessary companies which are not aligned with the ESG concept. In 2020 we witness an extensive market opportunity and demand for ESG. S&P 500 ETF has been converted into the S&P 500 ESG index, the $36.8m Xtrackers FTSE All-Share UCITS ETF (XASX) has been renamed the Xtrackers MSCI UK ESG UCITS ETF. This trend of changing core indices to incorporate ESG metrics could be a big win for MSCI which has now captured three ETFs and around $1bn assets from FTSE Russell.
Coming to Indian we need to explain the ESG concept and make people understand about the ESG related investments. But there is an inherent problem where the basic investment decision is driven by short term and even the long terms come under risk ESG might take some time to attract the eyes of the investor. ESG fixed income would a big opportunity for the market as traditional debt is struggling followed with a country like India where corporate is at risk ESG based Fixed income instruments can be filter check and a boon for the market.
The financial advisor should move ahead to recommend ESG products as multi-cap products and allocate around 5% to 10% into Model portfolios. A place in the asset allocation model will help the ESG to grow and its concepts will reach to every people. ESG will be a larger market in 2021 and fixed income products will be a whole new world in term of paper selection under ESG.
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