Mirae Asset ESG Sector Leaders ETF (Exchange Traded Fund)and Mirae Asset ESG Sector Leaders FoF ( Fund of Fund) opened for subscription on October 27 and will close on November 10.
They are open-ended schemes that track the Nifty 100 ESG Sector Leaders Total Return Index, developed by NSE jointly with Sustainalytics, a global ESG (environmental, social and corporate governance) research provider. Bharti Sawant, Fund Manager - Equity, Mirae Asset Investment Managers, tells us more on the funds and ESG investing in an email interview. Excerpts:
How conscious are Indian investors with respect to ESG issues of a company?
We have seen, time and again, how big corporates have failed and their investors have lost substantial wealth due to poor governance issues, product issues such adulterations in drugs, environmental damages leading to closure of plants, failure of banks’ internal mechanism to detect fraud, etc.
I think, in the last two-three years, given the rise in corporate governance fiascos, Indian investors have started realising that it is important to consider and evaluate non-financial parameters, too.
How different is the Nifty 100 ESG Sector Leaders Index from the existing Nifty 100 ESG and the Nifty 100?
Firstly, the universe is the Nifty 100. In this, companies engaged in the business of ethically and socially questionable businesses such as alcohol, tobacco, weapons, etc, are excluded.
Further, any company engaged in any severe controversy, as defined by Sustainalytics, is also excluded. Then, companies that have poor ESG risk rating are excluded.
After this, the Nifty 100 ESG Sector Leader Index goes one step ahead and checks how the company manages its ESG risk in relation to its global peers.
In the final step, top 75 per cent of companies are chosen across sectors to ensure representation of the best ESG companies from each sector and achieve portfolio diversification across the large-cap segment.
How is the performance of the Nifty 100 ESG Sector Leaders Total Return Index compared with the Nifty 100 and other global ESG indices?
Since its inception in Januay 2014 till September 2020, the Nifty 100 ESG Sector Index has generated an annualised return of 12 per cent with an annualised volatility of 16.8 per cent.
During the same period, the Nifty 100 index has given a lower return of 10.8 per cent with a higher annualised volatility of 17.2 per cent.
While past performance cannot be referred as guide for future performance, it exhibits that incorporating ESG factors has the potential to improve the risk-return reward.
Globally, too, ESG indices have outperformed their traditional counterparts.
For instance, the S&P 500 ESG index has outperformed the S&P 500 with an average alpha of 80- 100 bps in a longer investment horizon of three-plus years and an alpha of 100-300 bps in the short run.
How much of the valuations or the growth prospects of the companies does the index consider?
There is no explicit consideration to the valuation or the growth prospect of the companies in the index.
However, it is observed that companies that have generally strong ESG risk management practices tend to generate competitive advantage over others.
This competitive advantage has the potential to translate into higher sustainable profits.
Further, it is observed that the cost of capital for such strong ESG companies tends to be relatively low. Potential to generate higher sustainable profit, coupled with lower cost of capital, leads to commanding of premium in terms of valuation of such companies.
Both Axis and ICICI Prudential ESG funds can invest in global companies with high ESG scores. Being a passive fund, won’t the Mirae fund lose its edge here, considering that ESG-based investing is still at a nascent stage in India?
For us, it was important to keep the product simple, easy to understand, comprising names representing responsible business practices.
As a result of which, we have restricted our investment to India and Indian-specific companies in the large-cap segment.