Lately, I have been stumbling upon a lot of media articles about ESG funds. Maybe those AMCs are doing a lot of PR to reach out.
As per the definition of an ESG fund,
ESG funds are portfolios of equities and/or bonds for which environmental, social and governance factors have been integrated into the investment process. This means the equities and bonds contained in the fund have passed stringent tests over how sustainable the company or government is regarding its ESG criteria.
But when I checked the portfolios of these ESG funds, I found some having companies that produce large numbers of plastic waste. So I am confused if those ESG funds are really concerned about environmental impact. And in a country like India where such factors of doing business are always kept aside, in a race to make money, will these ESG funds ever stick true to their definition.
The likely reason for seeing a lot of articles about ESG investing might be because of the recent NFO from ICICI Prudential (as well as various other fund houses like DSP, Aditya Birla Sun Life, Kotak, and BNP having filed offer documents for launching their respective ESG funds)
One of the things that I find puzzling is that the underlying index (NIFTY100 ESG Index), which the currently available ESG funds loosely track, gives Reliance the highest weightage. Not that Reliance isn’t making efforts to improve their ESG impact but given the industry in which they operate (oil refining) as well as the ESG score they have (MSCI, Sustainalytics), its weightage should probably have been lower (According to the latest September 2020 Factsheet, its weightage is 11.37% in that index).
After seeing the portfolios of 3 currently active ESG funds, I noticed that 2 of them (SBI & Quantum) are invested in various Cement & Oil Refining companies. Normally those aren’t sectors that come to mind when one wants to invest in ESG funds. The fund offered by Axis seems more true to the ESG definition given that it doesn’t invest in the above sectors for starters. Also, they have allocated a little over 1/4 of their total capital for companies outside India which none of the other funds have done. But I too have my doubts about how much importance following ESG guidelines would be given if it comes at the cost of profits in Indian companies.
We thank you for your concern and we apologize for not replying earlier as this post missed our attention. We would like to share insight into how Quantum identifies companies that meet ESG standards and what are the parameters we use to check them. We began laying the foundation for ESG analysis right from 2015. Our ESG evaluation process consists of a blend of quantitative and qualitative factors.
30% weight is given to companies on their levels of disclosures provided in their sustainability reports / business responsibility reports / annual reports. Companies with higher disclosures get higher scores.
70% weight is given to companies on their ESG performance relative to their peers and national / global regulations on material ESG aspects. We perform a check for any past violations / red flags of certain E&S metrics and corporate governance regulations.
While computing the ESG score, 50% weightage is given to the Governance aspect, and the remaining 50% to the Environmental and Social aspects. Governance sits at the heart of our analysis because we believe governance shortcomings usually go hand in hand with poor performance on the social and environmental fronts. Companies which score positive and are above the minimum threshold ESG score are generally included in the portfolio.