A new breed of funds has been quietly entering the market. This category is popular abroad and many mutual fund industry officials here believe this would a majorly favoured theme domestically too. ESG is a combination of filters (environment, social and Governance) that your fund applies when picking stocks. Of course, such funds are still taking baby steps in India. A fresh scheme – ICICI Prudential ESG Fund – is being rolled out. The new fund offer period closes on October 5, 2020, after which it becomes an open-ended scheme. There are a few other existing schemes following the theme as well.
What is it about?
Typically, when your mutual fund hunts for a good stock to pick, it looks at the potential earnings, management quality, cash flows, the business it operates in and how it is expected to do versus competition. But, if the company’s products pollute the environment or it doesn’t really have the best employee practices – perhaps may be even questionable ones – it may not matter to a typical fund manager so long as the company makes profits.
Here’s where ESG investing comes in. Investors, especially large and institutional players such as pension funds, especially in the US and Europe, are now increasingly investing in companies that meet ESG standards. Companies that do not pollute the environment, conserve energy, promote gender equality, and indulge only in ethical practices are favoured over those that ignore such practices. That doesn’t mean ESG funds overlook a company’s profitability. It’s just that ESG funds invest ‘with a conscience.’
As per data put out by Morningstar in a presentation, ESG-focussed funds got inflows worth $154.1 billion in 2019, as compared to just $47.9 billion in 2018 and $72.8 billion in 2017.
ICICI Prudential ESG joins a small and emerging club of ESG funds in India. The fund houses of SBI, Quantum and Axis have schemes dedicated to the theme.
The scheme will invest in companies across market capitalisation. “We started our ESG focused research about three years ago and we have been looking at the ESG parameters in every company we have been investing in,” says Mrinal Singh, Deputy CIO-Equities, ICICI Prudential AMC.
ESG entails responsible investing and appeals to those who wish to invest with a conscience. And, going by historical evidence, gains don’t get compromised.
Rolled out in 2018, but with a history since April 2011, the Nifty 100 ESG index gave 10.75 percent returns, as compared to 8.89 percent returns delivered by the Nifty 100.
The fund house as well as Mrinal Singh come with a good track record in equity funds. Mrinal says that aside from managing schemes for Indian investors, fund houses such as ICICI Prudential AMC also advise offshore investors that are mainly large institutions, such as pension funds and, increasingly, he adds, most of these institutional investors have switched over to ESG investing. In other words, a single ESG fund here doesn’t necessarily mean the ESG research is limited. Like other fund houses in India that have launched ESG funds, ICICI Prudential too has been monitoring ESG scores of all its underlying companies.
A new scheme’s biggest drawback is the lack of a track record. Although the Nifty 100 ESG has outperformed the Nifty 100, we need to see how individual MF schemes perform.
Unlike in other developed countries where many core equity funds follow ESG parameters, in India we have separate ESG funds. This is a new territory for Indian fund managers. Your plain-vanilla diversified funds, therefore, are not fully ESG-compliant. This means an ESG fund is an additional fund in your basket, which calls for an additional allocation. For instance, Mrinal says that ESG funds avoid tobacco companies, but it could be an attractive investment option for its other diversified funds.
What should you do?Historically, ESG investing imposes additional criteria that companies have to satisfy before a section of investors (who wish to invest with a conscience) finds them appealing. But with more awareness, ESG investing is expected to become mainstream, where every equity fund would behave exactly like an ESG fund. In India, we are many years away from getting to that point. Till then, ESG-focussed schemes such as the ICICI Prudential ESG fund are the way to go; the lack of a track record notwithstanding.