Unlike other ESG funds rolled out so far, Mirae Asset ESG Sector Leaders ETF is passively-managed. It will aim to deliver returns in line with the underlying index
Mirae Asset ESG Sector Leaders Exchange-Traded Fund (ETF) is a new kid on the block. This is the fourth ESG (environmental, social and governance) fund to be rolled out by Indian mutual funds so far this year. Why are fund houses suddenly favouring ESG schemes?
What is Mirae Asset ESG Sector Leaders ETF all about?
Mirae ESG ETF is a scheme that will invest in companies that meet the environmental, social or governance standards. Most fund managers invest in companies that are well-managed and whose shares have the potential to grow in value. Profitability and competitiveness of these companies are among the most important factors that these fund managers consider. But some such companies might be polluting the environment. Or they could be following practices that could be construed as anti-employee or even anti-consumer. Some other companies in this lot might also have questionable corporate governance; but so long as they are profitable, investors don’t care.
That is where an ESG fund aims to make a difference. Aside from profitability and cash flows, ESG investing looks at various other factors in investing. Just because a company makes bumper profits, it doesn’t necessarily mean an ESG fund would invest in it.
Mirae ESG ETF is the first passively managed exchange traded fund (ETF) tracking the ESG theme in India. The fund aims to match the returns generated by the Nifty100 ESG Sector Leaders Index. Its units will be listed on both the BSE and NSE. You need a demat account to invest in an ETF. But if you don’t have one, the fund house has also rolled out the Mirae Asset ESG Sector Leaders Fund of Fund. This will be an open-ended scheme and will invest its entire corpus in the ESG ETF.
Businesses such as tobacco, alcohol, gambling and some controversial weapons manufacturing are excluded from the investible universe when an investor embraces ESG investing.
Though sustainable investing is catching up worldwide, in India, there is not much of a track record. MESG has chosen to track the Nifty 100 ESG Sector Leaders index. It removes companies stuck in governance issues or are in ethically questionable businesses enlisted above and includes only those companies that score above the average on ESG parameters compared to global peers in the same sub-industry.
The Nifty 100 ESG Sector leaders index is based upon the NSE100 ESG index that consists of 88 companies, which itself is a sub-set of the 100-stock Nifty 100 index. The Nifty 100 ESG Sector leaders index has only 48 companies. The Nifty100 ESG sector leaders index will rebalance itself twice a year. A look at the back-tested data shows that Nifty 100 ESG Sector Leaders TRI has given 9.98 percent returns in five years, compared to the 10.63 percent delivered by the Nifty 100 ESG TRI and 8.7 percent by the Nifty 50 TRI.
While Mirae ESG ETF will passively track its benchmark index, other ESG schemes launched so far are actively managed. Their fund houses will run internal checks to weed out those companies that do not meet their ESG parameters.
What does not work
The limited track record of ESG in the Indian market is a severe constraint for investors who want to understand the risk-reward proposition. Though ESG investing aims to be sustanable and may deliver superior returns compared to the broader markets with less volatility, there is no assurance that the theme may consistently outperform other diversified equity schemes. At a time when there is unprecedented volatility in the global markets, an actively managed diversified fund may help investors to load up on mis-priced opportunities. To be sure, Mirae Mutual Fund has done reasonably well in its actively managed schemes.
What should you do?
ESG theme of investing is catching up globally and cannot be ignored completely. Fund houses have been carefully incorporating some of the tenets of ESG investing while picking stocks for their actively managed schemes, even if their existing funds do not strictly follow all ESG-related principles. For those just starting their investment journey, a diversified equity fund with a good track record is a better option. It will still take a few more years before ESG investing in India builds a track record and more fund houses adopt it. Savvy investors consciously looking for exposure to the ESG theme using low-cost means can consider investing in this scheme.Mirae Asset ESG Sector Leaders ETF (MESG) opened for subscription on October 27, 2020 and will close on November 10, 2020.