ESG Investing Is Gaining Preference Among Investors. Should You Invest? - Outside View by PersonalFN

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ESG Investing Is Gaining Preference Among Investors. Should You Invest?
Oct 28, 2020

ESG is an evolving investment theme in India. It aims to pick quality companies by incorporating Environmental, Social, and Governance (ESG) factors and their impact throughout the investment process.

Once a niche, ESG investing is now a fast-growing preference for investors across geographies and is a popular theme in developed countries.

In fact, this was a less-known strategy in India a couple of years back, until SBI Mutual Fund converted its SBI Magnum Equity Fund into a ESG theme fund in 2018.

Thus, SBI Magnum Equity ESG Fund became the first ESG fund in India.

Notably, in July 2019 Quantum Mutual Fund launched the first ESG Fund NFO and introduced Quantum India ESG Equity Fund. Followed by Axis ESG Equity Fund (February 2020), and ICICI Pru ESG Fund (October 2020).

Also known as sustainable investing, ESG funds aim to identify quality companies with environment-friendly and ethical practices.

They invest in companies that score high on environmental, social, and governance parameters.

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Table: Performance of ESG Funds in India
  Absolute CAGR
Scheme Name 1 Month 3 Months 6 Months 1 Year 2 Years SINCE SI Benchmark
INCEPTION
Axis ESG Equity Fund 7.03 6.13 21.47 -- -- 18.36 3.27
ICICI Pru ESG Fund -- -- -- -- -- -- --
Quantum India ESG Equity Fund 6.99 10.55 33.33 10.01 -- 10.06 8
SBI Magnum Equity ESG Fund 4.88 4.69 28.11 -0.2 10.31 11.68 10.31
               
Nifty 100 ESG Index - TRI 6.72 7.35 31.26 9.35 --    
S&P BSE SENSEX - TRI 7.52 5.58 29.23 3.97 11.02    
(Performance as on 26th October, 2020)
(Source: ACE MF)

The ESG theme can potentially reward long-term investors looking for quality stocks that could add sustainable value and do well even in depressing conditions.

At present there are only 4 ESG Funds in India having a combined AUM of around Rs 6,000 crore; with 2 new additions to the list, and some more are on the verge of launch.

quant ESG Equity Fund, Mirae Asset ESG Sector Leaders ETF, and Mirae Asset ESG Sector Leaders Fund of Fund are the new ESG Fund NFOs currently open for fresh subscription.

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About quant ESG Equity Fund

quant ESG Equity Fund is an actively managed open-ended thematic fund that will focus on investing in companies identified based on the ESG theme.

The investment objective of the scheme is to generate long-term capital appreciation by investing in a diversified portfolio of companies demonstrating sustainable practices across Environmental, Social, and Governance (ESG) parameters.

NFO Details - quant ESG Equity Fund

  • quant ESG Equity Fund is open for subscription from October 15, 2020 and will close on October 30, 2020.
  • NFO price: Rs 10 per unit
  • The minimum subscription amount is Rs 5,000 and in multiples of Re 1 thereafter.
  • The fund offers Regular Plan and Direct Plan having Growth Option and Dividend Option (Dividend Re-investment and Dividend Pay-out facilities).
  • The scheme's performance will be benchmarked against Nifty 100 ESG TRI (Total Return Index).

Investment Strategy - quant ESG Equity Fund

Under normal circumstances, 80% to 100% of the quant ESG Equity Funds portfolio will be invested in companies with favourable ESG criteria. It can invest up to 20% of its assets in Equity & Equity related securities of other companies.

The fund may seek investment opportunities in foreign securities including ADRs / GDRs / Foreign equity and debt securities subject to SEBI (MF) Regulations. Such investments shall not exceed 35% of the net assets of the Scheme.

It can also hold up to 20% of its assets in Debt & Money Market Instruments and has the flexibility to invest up to 10% of its assets in Units issued by REITs and InvITs.

The stock selection of the scheme is based on the Environmental, Social, & Governance aspects of the companies.

The endeavor of the Scheme would be to follow ESG parameters that can impact or pose risks to the long-term sustainability of the business, delve deeper into a company's management practices, culture and risk profile, which would thereby help in understanding the impact on long term investors.

Who will manage quant ESG Equity Fund?

quant ESG Equity Fund will be managed by Mr. Anikt Pande, Mr. Sanjeev Sharma, and Mr. Vasav Sahgal.

Mr Ankit Pande is the Fund Manager - Equity at quant Mutual Fund. He has an experience of 8 years in Indian equities and of 3 years in software products. Mr Pande began his career in equity research in 2011, picking up the (U.S. based) CFA charter in 2015 and MBA from The Chinese University of Hong Kong in 2017. He won the Thomson Reuters StarMine Award for best stock picker in the IT sector in 2014 and is a lifetime member of the Beta Gamma Sigma honour society.

Mr Sanjeev Sharma is Fund Manager - Debt at quant Mutual Fund. He has a total work experience of 17 years, including 13 years of experience in the financial market. Mr Sharma has a PGDBA (Finance), M.com and CerTM (Treasury & Forex Risk). He specializes in identifying crucial inflexion points in securities.

Mr Vasav Sahgal is Fund Manager - International Equities at quant Mutual Fund. He has more than three and a half years of experience handling various front office responsibilities such as: Equity and Fixed Income research, Portfolio Management, Data Analytics and Python Programming. Mr Sahgal is a Bcom graduate and has Passed CFA level 3.

Fund outlook - quant ESG Equity Fund:

ESG based funds emphasise on investment in companies with sustainable and responsible business models.

The underlying drive behind ESG theme-based investing lies in generating returns from socially responsible, environment friendly and ethical firms. It reduces the company-specific risk associated with ESG controversies.

Accordingly, quant ESG Equity Fund will focus on investing in high quality stocks of companies demonstrating sustainable practices across Environment, Social, and Governance theme.

Companies with high ESG score exhibit better risk management measures on ESG parameters, which in turn could create value for investors with their long-lasting sustainable business models.

About Mirae Asset ESG Sector Leaders ETF

Mirae Asset ESG Sector Leaders ETF is India's first ESG ETF.

It will be a passively managed fund that will be replicating/tracking Nifty 100 ESG Sector Leaders Total Return Index.

The investment objective of the scheme is to generate returns, before expenses that are commensurate with the performance of the Nifty 100 ESG Sector Leaders Total Return Index, subject to tracking error. The Scheme does not guarantee nor assure any returns.

NFO Details - Mirae Asset ESG Sector Leaders ETF

  • Mirae Asset ESG Sector Leaders ETF opens for subscription from October 27, 2020 and closes on November 10, 2020.
  • Value of each unit of the scheme will be approximately equal to 1/100th of the value of Nifty 100 ESG Leaders Index on the date of allotment of units.
  • The minimum subscription amount is Rs 5,000 and in multiples of Rs 1 thereafter.
  • The scheme does not offer any Plans/Options for investment.
  • The scheme's performance will be benchmarked against Nifty 100 ESG Sector Leaders Total Return Index (TRI).

Investment Strategy - Mirae Asset ESG Sector Leaders ETF

Mirae Asset ESG Sector Leaders ETF will be managed passively with investments in stocks constituting the Nifty100 ESG Sector Leaders Index.

It will endeavor to track the benchmark index and invest in the similar proportion (weightage) as in the Nifty100 ESG Sector Leaders Index.

Under normal circumstances, 95% to 100% of the funds portfolio will be invested in Securities included in the Nifty100 ESG Sector Leaders Index.

Notably, Nifty100 ESG Sector Leaders Index aims to track the performance of select companies within each sector of the Nifty 100 that have scored well on management of ESG risk and do not have involvement in any major controversies.

The index tracks a portfolio of select large cap stocks within each sector performing well on ESG parameters. It excludes companies involved in any major Environmental, Social, or Governance controversy, or those engaged in the business of tobacco, alcohol, controversial weapons, and gambling.

The investment strategy of the fund would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, considering the change in weights of stocks in the Index as well as the incremental collections/redemptions in the scheme.

A part of the fund's portfolio may be invested in debt and money market instruments to meet the liquidity requirements.

It can invest up to 5% of its assets in Money market instruments / debt securities, Instruments and/or units of debt/liquid schemes of domestic Mutual Funds.

The fund will not invest in ADR/ GDR / Foreign Securities / Securitized Debt/ structured obligation/ Repo in Corporate Debt Securities nor will it engage in short selling.

About Mirae Asset ESG Sector Leaders Fund of Fund

Mirae Asset ESG Sector Leaders Fund of Fund is an open-ended fund of fund scheme that will invest predominantly in Mirae Asset ESG Sector Leaders ETF.

The investment objective of the scheme is to provide long-term capital appreciation from a portfolio investing predominantly in units of Mirae Asset ESG Sector Leaders ETF. There is no assurance that the investment objective of the Scheme will be realized.

NFO Details - Mirae Asset ESG Sector Leaders Fund of Fund

  • Mirae Asset ESG Sector Leaders Fund of Fund opens for subscription from October 27, 2020 and closes on November 10, 2020.
  • NFO price: Rs 10 per unit
  • The minimum subscription amount is Rs 5,000 and in multiples of Rs 1 thereafter.
  • The fund offers Regular Plan and Direct Plan having Growth Option and Dividend Option (Dividend Re-investment and Dividend Pay-out facilities).
  • The scheme's performance will be benchmarked against Nifty 100 ESG Sector Leaders Total Return Index (TRI).

Investment Strategy - Mirae Asset ESG Sector Leaders Fund of Fund

Mirae Asset ESG Sector Leaders Fund of Fund will predominantly invest in units of Mirae Asset ESG Sector Leaders ETF, the portfolio of which will be mostly based on stocks forming part of Nifty100 ESG Sector Leaders Index.

Under normal circumstances, 95% to 100% of the fund's portfolio will be invested in Units of Mirae Asset ESG Sector Leaders ETF.

It can invest up to 5% of its assets in Money market instruments / debt securities, Instruments, and/or units of debt/liquid schemes of domestic Mutual Funds.

The fund will indirectly benefit from the underlying exposure to stocks scoring high on Environmental, Social, & Governance parameters.

Notably, the underlying Mirae Asset ESG Sector Leaders ETF endeavors to track the Nifty100 ESG Sector Leaders Index that carries a portfolio of select large cap stocks within each sector performing well on ESG parameters.

Who will manage Mirae Asset ESG Sector Leaders ETF, and Mirae Asset ESG Sector Leaders Fund of Fund?

Both, Mirae Asset ESG Sector Leaders ETF and Mirae Asset ESG Sector Leaders Fund of Fund will be managed by Ms. Bharti Sawant.

Ms. Sawant's work experience spans more than 12 years and her primary responsibility includes Investment Analysis & Fund Management. She has CFA, (ICFAI Hyderabad) and B.Com. Ms. Sawant has been associated with Mirae Asset AMC as an Investment Analyst since September 3, 2013. She was previously associated with Sushil Finance Securities Pvt. Ltd., Latin Manharlal Securities Pvt. Ltd., Kabu Shares & Stocking Pvt. Ltd. for Financial Analysis and Research.

Fund outlook - Mirae Asset ESG Sector Leaders ETF, and Mirae Asset ESG Sector Leaders Fund of Fund:

ESG investing is a popular investment theme in developed countries, and is now a fast-growing preference for investors across geographies.

Both the funds intent to directly and indirectly replicate the portfolio and track the performance of the Nifty100 ESG Sector Leaders Index (TRI).

The index comprises true to the label ESG focused portfolio with underlying research by Sustainalytics, one of the leading ESG research provider globally. It excludes companies with significant on-going controversy and therefore reduces the risk associated with such companies.

Accordingly, the underlying exposure of both the funds will be in companies that are sustainable from an environmental and social perspective along with having the best governance practices.

Being a passively managed fund, Mirae Asset ESG Sector Leaders ETF will closely track the performance of Nifty100 ESG Sector Leaders Index TRI by mirroring its portfolio, without any deep analysis on stocks. Accordingly, the fund's portfolio will be restricted to stocks that are the constituents of the index.

Notably, Mirae Asset ESG Sector Leaders Fund of Fund too will be exposed to the above index. Its performance will rely solely on the performance of the underlying Nifty100 ESG Sector Leaders Index TRI, subject to tracking error of the underlying ETF.

Both the Mirae ESG funds are suitable for investors looking to hold passive exposure in Nifty100 ESG Sector Leaders Index TRI. Being passively managed, one should not expect the fund manager to generate alpha over the benchmark index.

The index constitutes of stocks of high-quality companies that could add value through sustainable business models and help investors benefit in the long run.

One should have a longer investment time horizon while investing in Mirae Asset ESG Sector Leaders ETF and Mirae Asset ESG Sector Leaders Fund of Fund.

Editor's Note: Similar to the principle of ESG investing that aims to pick quality sustainable stocks scoring high on ESG parameters, PersonalFN follows SMART Score process to pick quality mutual funds scoring high on a host of qualitative and quantitative parameters. Try FundSelect to get access to carefully picked quality mutual funds backed by PersonalFN's SMART Score Process. Get the details here.

Author: Vivek Chaurasia

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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