ICICI Prudential ESG Fund NFO: Another option for ESG investing

It’s still rather nascent in India, but like in the global market, ESG (environmental, social and governance) investing is expected to see good traction in the country, too, in the coming years.

That’s thanks to growing awareness among many investors about the concept of sustainable or responsible investing based on three key parameters — environmental empathy, social responsibility and good corporate governance.

ESG investing essentially involves investing in stocks of companies that score well on these three parameters and keeping away from companies that don’t.

So, for instance, ESG investors will typically not invest in socially ‘sin’ stocks such as tobacco and alcohol, or in companies that are environmental pollutants (think coal miners) or fail the corporate governance test (say, due to manipulation of records or trampling upon rights of minority shareholders).

On the other hand, say, a software company with a reputation for sustainable, ethical, lawful practices towards various stakeholders will likely make the ESG cut.

Nascent category

As of now, there are only three ESG mutual funds in India, that too without much of a track record — SBI Magnum Equity ESG (recategorised in May 2018), Quantum India ESG Equity (launched in June 2019) and Axis ESG Equity (launched in January 2020). The size of these funds are also modest — ₹18 crore (Quantum), ₹1,755 crore (Axis) and ₹2,772 crore (SBI) as of August 2020.

ICICI Prudential ESG will be the new fund on the block, and similar to the older funds, it too will be benchmarked against the Nifty 100 ESG TRI.

The NFO opened on September 21 and will close on October 5. It is an open-ended fund and will be available for subscription even after the NFO, at the prevailing net asset value (NAV). More NFOs of ESG funds from other fund houses are expected going forward.

It helps that the Nifty 100 ESG TRI has done well — outperforming the Nifty 50 TRI over the past one, three and five years.

Also, amid the market turbulence this calendar year, the Nifty 100 ESG TRI did better than the Nifty 50 TRI.

Among the funds, over the past year, Quantum India ESG Equity has done better than both the Nifty 100 ESG TRI and the Nifty 50 TRI, while SBI Magnum Equity ESG has lagged; Axis ESG is yet to complete a year (see table).

Similar to its peers, ICICI Prudential ESG will be an actively managed fund. The scheme will select stocks based on its internal research and/or from the Nifty 100 ESG universe; the portfolio could have stocks beyond the index also.

As of August 17, 2020, the Nifty 100 ESG index had 88 companies across 17 sectors, with Reliance Industries, Infosys and HDFC Bank having the highest weightage (9-11 per cent).

The scheme will invest 80-100 per cent of its corpus in companies with strong ESG scores. It can also invest in global companies with a high ESG score; in this, the fund shares a similarity with Axis ESG Equity that invests up to 30 per cent in global sustainable companies.

ICICI Prudential ESG fund manager Mrinal Singh says the ESG criteria will be the first filter and then stocks will be chosen based on their fundamental attributes.

The ESG scores for companies will be decided on a scale of 0 (worst) to 10 (best) based on actions taken by them in all the three spheres — E, S and G.

Singh says the governance aspect (G) will have a higher weightage. He adds that the fund will look for stocks across market-caps including smaller companies, and will have an eye on superior return potential. It will not invest in unlisted companies but could look at suitable IPOs. The fund will have a diversified portfolio of at least 30-40 stocks.

Adverse events/controversies in portfolio stocks will lead to revaluation and temporary or permanent exits from such stocks, depending on the nature and extent of the impact.

Singh says that for the past four years, ICICI Prudential AMC, in its international advisory business, has been engaged on the ESG mandate, and has developed capabilities in this area.

Our take

The ESG fund space is still largely novel in India, but it could see significant interest in the coming years. As it stands, even the existing funds are fairly new with little in terms of track record. The benchmark Nifty 100 ESG TRI though has done better than the Nifty 50 TRI.

Investors who seek ESG stocks can consider deploying some money in the NFO to test the waters.