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Environment, Social and Governance are vital facets of the larger ecosystem we live in. Sensibly handling of the environment and social issues, like global warming, pollution control is essential in the path to progress and sustainable living. Governance also plays a key role, without which, everything can fall apart and progress in its true sense may never see the light of the day.

Thankfully, the private sector now is recognising the importance of this larger goal. In addition to, taking Corporate Social Responsibility (CSR) projects, many of them are even making conscious investment choices, turning sensitive to Environment, Social and Governance (ESG), which are crucial subject matters.

For example, a company with lower carbon emission would be a better company than a polluter as it will face lower regulatory or societal risk. So, its shares would be less volatile over time and will provide better returns, if invested in it.

A perfect way, to put it would be, finance without sustainability is a disastrous recipe for environment and society.

Recent Launch of ESG Fund in India

Due to increasing incongruencies in corporate governances being surfaced, following the ESG theme is something the fund managers are open to adopting as an investment methodology to offer investors potential long-term performance advantages.

ESG funds are slowly been considered and gaining popularity among investors including FIIs who want to be seen to be contributing towards cutting down global warming, along with value additions to human development and without compromising on financial returns.

Depending on the ESG score, a stock is selected to invest while creating a portfolio of such a scheme. A higher score of a company indicates "cleaner and greener business".

ESG factors will give fund managers an insight into the quality of a company's management, culture, risk profile and other characteristics. By adding this increased level of scrutiny associated with ESG analysis is helpful in creating a portfolio that will create potential gains.

In one of the story Forbes India covered, mentions, "Environmental scores are the aggregation of carbon emissions, biodiversity impact and water consumption; the social dimension includes human rights, non-discrimination, health and safety; the governance factor assesses board independence, shareholder's rights and a company's business ethics.

Better sustainability practices are becoming increasingly important to both companies and investors. Consequently, ESG funds, which are common globally, are starting to find a place in India."

Hence it is important for fund managers to be ethical and sensitive towards these issues and invest sensibly in the long-term interest of investors.

At the broader level, asset managers will serve a fiduciary responsibility for the well-being interest of investors and the community or society at large.

Quantum Mutual Fund, keeping sustenance parameters in mind launched Quantum India ESG Equity Fund (QIESGEF).

Besides, in 2014, India introduced a national level cleanliness movement- "Swachh Bharat Abhiyan". The aim was to clean length and breadth of the country, provide cleaner natural resources, improve hygiene and health and contribute towards achieving the sustainable development goal established by the United Nations in 2015.

With the launch of Quantum India ESG Equity Fund, the fund house shows its support to the mass movement for cleanliness and sustainability and takes a step forward towards ensuring that investments flow into greener and cleaner business.

The focus would be on businesses that will ensure sustainable management of natural and human resources, have a diverse organisational structure, prudent management, and follow a socially responsible framework of business.

But, in terms of risk-return matrix, being a thematic fund, QIESGEF involves extremely high risk, if the portfolio is highly concentrated, and hence it is a very-high-risk high-return investment proposition.

[Read: Four Types of Mutual Fund for Aggressive Investors]

However, note that since the approach is focused on ESG parameters the scheme is value agnostic, to form a well-diversified portfolio of stocks from various sectors and across market capitalisation.

Hence, it's noteworthy that given the positive characteristics of ESG investing, it can outweigh the risks in the long-term and prove to be a rewarding experience.  Thus, QIESGEF is suitable only for investors who have a high-to-very high-risk appetite and an investment horizon of at least 5 years

Table 1: NFO Details

(Source: Scheme Information Document)

How will the scheme allocate its assets?

The asset allocation under the Scheme, under normal circumstances, will be as follows:

Table 2: QIESGEF's Asset Allocation

Instruments	Indicative Allocation (% of Total Assets)		Risk Profile
	Minimum	Maximum	High/ Medium/ Low
Equity & Equity Related Instruments of Companies following ESG Criteria	80	100%	High
Money Market Instruments and Liquid Schemes of Mutual Funds	0	20	Low

The Scheme will not invest either in Repo of Corporate Debt Securities, Securitized Debt Instruments, Foreign Securities or Derivatives.
In accordance with SEBI Circular No. CIR / IMD / DF/11/2010 dated August 8, 2010, the aggregate asset allocation will not exceed 100% of the net assets of the scheme.
The Scheme, under normal circumstances, shall not have exposure of more than 50% of its net assets in stock lending. The Scheme may also not lend more than 5% of its overall stock lending exposure to anyone intermediary to whom securities will be lent. (Source: Scheme Information Document)

What will be the Investment Strategy?

The focus of Quantum India ESG Equity Fund will be on investing in businesses, which are ensuring sustainable management of natural and human resources, diversity within the organizational structure, prudent management and socially responsible framework of business.

The investment strategy determines sector weightages to reflect that of broad, well-diversified indices of the Indian equity markets. Further, the strategy aims to invest in companies within each sector that stand high on the Environmental, social and Governance (ESG) parameters.

The investment strategy of the Scheme will be to invest in a basket of stocks after intensive analysis on the environmental, social and governance aspects of the company. The aim is to follow a comprehensive 'ESG Framework' in order to develop a deeper understanding into a company's management practices, sustainable businesses and risk profile, which would thereby help us in understanding the impact on long-term sustainability that drives performance.

The primary focus of the Scheme will be on companies based on two criteria:

1. First is for selecting companies under coverage; and

2. Second is for selecting companies in the portfolio

The first criteria is selecting companies generally trading with the liquidity of minimum US $ 1 million on an average over the last 12 months and second criteria based on their ESG score.

Each security, which is filtered based on first criteria, will be scored on ESG parameters using data sources such as sustainability reports (Global Reporting Initiative (GRI)Framework) Business Responsibility Reports (BRR) and other publicly available documents. Active weights of security within their respective sector will be determined by a composite ESG score. A higher ESG score of security within the sector will have higher relative weight and vice versa.

The selection process ensures eliminating exposure to companies that rank poorly on ESG criteria completely. The sum total of the weights of securities in a sector will be equal to the tracked sector weights of broad well-diversified indices. The allocations focus on governance and sustainability; hence will be agnostic to valuations.

So, the investment process will consist of...

• Benchmarking sector weights to that of broad well-diversified indices in the Indian equity markets

• Stock selection

• Portfolio Construction

AMC's stock selection approach is basically based on ESG scores.

(Source: Scheme Information Document)

For the portfolio construction of Quantum India ESG Equity Fund, it is stated:

1. The stock should generally have average liquidity of minimum US$ 1 million over the last 12 months.

2. Every Stock with ESG composite score equal to or above the threshold ESG score will be part of the portfolio.

3. The AMC would generally not try to time the market and will add stocks that meet the ESG criteria on set rebalancing dates. Every stock in the portfolio will be bought and sold based on weights allotted to it and will be valued agnostic. The AMC will set sector weights for the portfolio in accordance with sector weights of a broad well diversified India equity Index.

4. In case, there are no stocks with ESG score greater than or equal to the set threshold ESG composite score in a sector, the weight of that sector is redistributed on a relative basis among other sectors, where the stocks meet the ESG criteria. Consequently, the weights of individual stocks qualifying the ESG criteria within those sectors will also change accordingly.

5. The AMC will periodically review and if necessary, rebalance the portfolio typically coinciding with a rebalancing of the underlying indices and/or quarterly. The AMC will also seek to periodically rebalance the portfolio on account of a new addition of stock, company-specific events and in case of a change in the view of the sector or the company.

The aim of the Quantum India ESG Equity Fund is to provide the investors with an opportunity to have an exposure to sustainable investment option.

Who will manage the Quantum India ESG Fund?

The Quantum India ESG Equity Fund will be managed by Mr Chirag Mehta and Ms Sneha Joshi.

Mr Chirag Mehta, a Senior Fund Manager at Quantum Mutual Fund. He is a qualified CAIA (Chartered Alternative Investment Analyst) and has to his credit a Masters in Management Studies (MMS) specializing in Finance. He has over 13 years of experience handling commodities and a total experience of more than 15 years.

Currently, at the fund house, some of the other schemes Mr Chirag manages as fund manager are: Quantum Gold ETF, Quantum Gold Savings Fund, Quantum Equity Fund of Funds and Quantum Multi Asset Fund.

Ms Sneha Joshi will be the Associate Fund Manager for Quantum India ESG Equity Fund.

Ms Sneha holds a PhD in Economics and has done an M.A. in Economics from Gokhale Institute of Politics and Economics, Pune. She has over 6 years of experience in economic, credit and quantitative research. She joined Quantum AMC in August 2015, and prior to that, was associated with Credit Capital Research as a fixed income research analyst.

The outlook for Quantum India ESG Equity Fund

The awareness about ESG issues has grown considerably. An increasing number of investors are consciously considering 'sustainability' as an important aspect of their portfolio while they aspire to be socially responsible investors.

Even Foreign Institutional Investors (FIIs) have now become increasingly conscious about where they invest. Besides, more and more companies are making a conscious effort and improving their ESG practices. Globally, ESG theme of investment is mature and forms a significant part of investors portfolio, especially in Europe and the US.

But recently in India too, due to corporate governance issues, the focus has shifted to adopt ESG investing. And it was reported in the news that one of the eminent Indian Mutual fund house signed the UN-supported Principles for Responsible Investment (PRI) - a global network of investors that attempts to integrate ESG practices into investment practices along with four more investment management firms from India

Also, in recent years, the availability of alternative ESG information and tools has vastly increased to assist in worthy decision making that can, in turn, go on to build long-term wealth for investors. And even the research findings show that cleaner and greener businesses are potential wealth creators.

Graph: How has the Nifty 100 ESG index fared?

Note: Nifty 100 ESG index has a base date of April 1, 2011, and a base value of 1000
(Source: NSE Indexogram Factsheet as on May 31, 2019)

How the fund managers construct the portfolio in current turbulent times remains to be seen despite the various filters they will use to pick stocks as it is a challenging task. Thus, the fortune of the Quantum India ESG Equity Fund will be closely linked to how well the fund managers and his team assess the scenarios and risk management measures they adopt.

[Read: Looking for The Best 'Value Funds' For 2019? Find Out Here]

This article first appeared on Certified Financial Guardian.  

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firstadvisermarketlead@gmail.com Sep 21, 2019 Loved the way you tell your article. Thanks for such a knowledgeable and beautiful article. http://blog.firstadviser.in/nifty-future

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