Morningstar’s CEO Kunal Kapoor recently spoke in detail on why ESG matters at Morningstar. The world around us has changed. Investors are bringing different values and an entirely different ethos of responsibility to how wealth is invested. And rightly so.
As the world struggles with multiple crisis – climate and social unrest, there is a need for all of us to do our bit. If you are fortunate enough to be an investor, perhaps the most impactful thing you can do right now is to focus your investments around sustainability.
Across the globe, we are seeing tremendous growth in sustainable investing. It initially was driven by institutional investors but is gaining traction amongst retail investors too.
A number of asset management companies have launched specific ESG funds – an acronym for Environmental, Social, Governance.
While you can read more about sustainability here, we have put together a convenient listing. Here are the ESG mutual funds available to the investor in India. The funds listed are in alphabetical order.
Aditya Birla Sun Life ESG Fund
- Inception: December 2020
- Fund Manager: Satyabrata Mohanty
- Number of equity holdings: NA
- Top 5 holdings: NA
- Management Style: Active
- Return: NA
- Investment Style: The fund will maintain a market cap agnostic portfolio with 60-80% in large cap and remaining in mid and small caps. It will have a focused portfolio of 40-50 ESG compliant companies. The fund can invest in international securities adhering to ESG practices up to 35% of the fund’s net assets.
ESG practices build a long term enduring business model
“ESG is a powerful concept that has been well accepted globally. In India too we see the growing prominence of this theme. Governance has always attracted market attention but over time environmental and social aspects will become more crucial as regulators and society demand prudence. Corporate India has enough success stories on ESG where managements have shown deeper commitment towards all stakeholders. Companies following sustainable ESG practices build a long-term enduring business model, which leads to superior risk-adjusted return.” - Satyabrata Mohanty, Senior Portfolio Manager, Aditya Birla Sun Life AMC Ltd.
Axis ESG Fund
- Inception: February 2020
- Fund Manager: Jinesh Gopani
- Number of equity holdings: 52
- Top 5 holdings: Bajaj Finance, Kotak Mahindra Bank, HDFC Bank, Avenue Supermarts, Tata Consultancy Services.
- Management Style: Active
- Return: 31.20% since inception as on December 23, 2020. Regular Plan.
- Investment Style: A minimum of 80% of the portfolio is invested in stocks that rate highly on ESG factors. The allocation is based on a detailed review of each company with fundamental analysis.
ESG is the need of the hour
“ESG theme is becoming not just a luxury but indeed a necessity in the present-day scenario. With all stakeholders such as customers, investors and regulators demanding changes in the way businesses are being run, these non-financial factors are coming into the forefront for most companies. Companies that effectively manage the ESG factors through their corporate actions can provide attractive long term investment opportunities and will face significantly lower disruption risks to their business model. Therefore, companies with strong ESG practices score higher in terms of reputation and carry lower risk probability because they incorporate sustainability as a core value. This translates into steady and more sustainable performance for the business over the years. On the other hand, companies which are weak on ESG due to irresponsible business practices expose investors to higher risks and greater potential for sudden shocks/losses over the long term.” - Jinesh Gopani, Head - Equity, Axis AMC.
ICICI Prudential ESG Fund
- Inception: October 2020
- Fund Manager: Mrinal Singh
- Number of equity holdings: 30
- Top 5 holdings: HDFC Bank, Kotak Mahindra Bank, Housing Development Finance Corp, Infosys, Reliance Industries Ltd.
- Management Style: Active
- Return: 10.90% since inception as on December 23, 2020. Regular Plan.
- Investment Style: The fund invests in companies with a high ESG score, which reflects the strength and stability of the company. The stock selection process is based on internal research and from the Nifty ESG universe. The fund can also invest in global firms with high ESG score.
ESG investing will grow in India
“There is a global awareness towards ESG in every aspect of conducting business and that's evident from world leaders like our PM Modi making a commitment to reduce carbon emissions by 30% by 2050. It is imperative that our society also wants to see businesses being more responsible with respect to ESG. This trend is already visible in lending practices and investor participation globally. In India, it is gaining traction and we believe that this focus is only going to grow bigger and deeper over a period of time. When India is compared to the developed world in this context, first there are different set of companies and different practices are followed. However, access to capital and requirement by customers makes them align to the ESG framework. Very often we also see companies do it by themselves and sometimes there is a nudge from customers/investors/society. Generally, such companies have a good trend historically also in price discovery and business growth.” - Mrinal Singh, Deputy CIO – Equity, ICICI Prudential Mutual Fund.
Kotak ESG Opportunities Fund
- Inception: December 2020
- Fund Manager: Harsha Upadhyaya
- Number of equity holdings: NA
- Top 5 holdings: NA
- Management style: Active
- Return: NA
- Investment Style: It will focus on the ESG principles and disclosures of the investee company with the flexibility of investing across market capitalisation range. The fund will design a portfolio of 40-60 stocks based on ESG Score and its proprietary Business, Management & Valuation (BMV) approach.
There’s a global push towards ESG
“Globally, investors are increasingly evaluating ESG performance and disclosures. Put simply, the performance of all three bottom-lines – Profit, Planet (environment) and People (social) are equally important as against looking at only the Profit bottom-lines. ESG investment principles look at ‘how companies make money’ and not just at ‘how much money the company makes’. Internationally, over $100 trillion worth of investments are based on ESG principles and these assets are growing significantly. Given the way ESG investment has gained significance across the globe, we expect it to become part of mainline investments in India too, over the next few years.” - Harsha Upadhyaya, President & Chief Investment Officer - Equity, Kotak Mahindra AMC.
Mirae Asset ESG Sector Leaders ETF
- Inception Date: November 2020
- Fund Manager: Bharti Sawant
- Number of equity holdings: 48
- Top 5 holdings: HDFC Bank, Infosys, HDFC Ltd, Reliance Industries Ltd, TCS Ltd.
- Management Style: Passive
- Return: 5.25% since inception as on December 23, 2020.
- Investment Style: The ETF will be managed passively with investments in stocks in a proportion that match as close as possible to the weights of these stocks in Nifty 100 ESG Sector Leaders Index.
Transparency is important in ESG investing
“In the context of India, we have seen time and again how big corporates have failed and their investors have lost their substantial wealth due to poor governance issues, product issues such adulterations in drugs, environmental damages leading to closure of plant, failure of banks internal mechanism to detect fraud, etc. As a result of which investors have started looking at parameters that are beyond the financial statements. Investors need to be aware of greenwashing, where the company claims to be ESG compliant but it is not, for this it is important for an investor to understand the process and framework of ESG funds of labeling constituent as ESG compliant. In ESG investing, transparency will be of paramount importance. In the coming future we will witness companies making the shift from doing Corporate Social Responsibility, or CSR, to focusing on Creating Shared Values, or CSV.” - Swarup Mohanty, CEO, Mirae Asset Mutual Fund.
Quantum India ESG Equity Fund
- Inception Date: July 2019
- Number of equity holdings: 47
- Top 5 holdings: Infosys, Tata Consultancy Services, HDFC Bank Ltd, Housing Development Finance Corp Ltd, Wipro.
- Fund Manager: Chirag Mehta
- Return: 22.65% YTD as on December 23, 2020. Regular Plan.
- Investment Style: The fund uses its proprietary framework based on ground research in evaluating companies. It aims to find sustainable businesses that are not only environmentally and socially responsible but also make sense as investments to build wealth over the long term.
ESG is not a “tick the box” desk research
“ESG aspects help us ascertain how prepared companies are to mitigate various material risks and capitalize on opportunities. The idea is to develop a truly granular understanding of the extent to which a company will be a good long-term steward of capital. Responsibility and profitability are indeed wholly complementary. We believe ESG investing will continue to evolve and gain higher acceptance from investors as they see more evidence and get further convinced on its value proposition. We understand that ESG is not a “tick the box” desk research. We do not restrict our research to just self-declared company disclosures.” - Chirag Mehta, Senior Fund Manager, Alternative Investments, Quantum AMC.
quant ESG Equity Fund
- Inception: October 2020
- Fund Manager: Ankit Pande
- Number of equity holdings: 22
- Top 5 holdings: Fortis Healthcare, DLF, Page Industries, L&T Technology Services, Adani Ports & Special Economic Zone.
- Management style: Active
- Return: 15.30% since inception as on December 23, 2020. Regular Plan.
- Investment Style: It invests in companies by assessing them based on quant’s VLRT+Q2 framework, which is valuation analytics, liquidity analytics, risk appetite analytics, timing coupled with qualitative and quantitative modifications for ESG integration. The fund will invest in 40-60 stocks which comply with ESG framework and can invest up to 35% in overseas stocks that fit ESG criteria.
Need to quantify non-financial data
“In India, there’s a long roadmap to ESG integration. In the past 30 years of my experience in the financial markets, we have been quantifying economic and financial data. With ESG Investing, there has been a unique development and a great learning curve to understand the quantification of non-financial data. The integration of non-financial data will only evolve as sustainable investing becomes a greater part of the investing gamut.” - Sandeep Tandon, Chief Investment Officer, quant Mutual Fund.
SBI Magnum Equity ESG Fund
- Inception Date: Changed from SBI Magnum Equity Fund to SBI Magnum Equity ESG Fund in May 2018
- Fund Manager: Ruchit Mehta
- Number of equity holdings: 39
- Top 5 holdings: HDFC Bank, Infosys, Tata Consultancy Services, Reliance Industries Ltd, ICICI Bank.
- Management Style: Active
- Return: 10.84% YTD as on December 23, 2020. Regular Plan.
- Investment Style: The fund aims to follow an ‘ESG Framework’ in order to delve deeper into a company’s management practices, culture and risk profile to understand the impact on long term shareholders. It invests a minimum of 80% in stocks fitting ESG criteria and up to 20% in other equities and/or debt & money market instruments.
There is a lack of quality data on ESG
“ESG investing faces its own set of challenges, the primary one is a lack of quality data. In our experience the lack of data has been not because companies don’t have good sustainability practices, it’s just that the disclosures are lacking. The second one is educating investors that ESG is not some esoteric theme, but a much more holistic way of evaluating and protecting investments made. Ultimately it is about the sustainability of a business in an ever-changing world. And as the focus shifts to the longevity of a business (and implicitly the valuation of an enterprise), it is likely that ESG investing becomes more mainstream and much more integrated into the security selection process itself.” Ruchit Mehta, Fund Manager, SBI Mutual Fund.