ESG INVESTING - A WORTHY PROPOSITION IN THE LONG RUN?

To make our planet better, each one of us needs to consciously contribute and work towards it. Even when we deploy the investors’ hard-earned money, embracing ‘socially responsible investing’ is essential. Fundamentally, as a part of a larger ecosystem, each one of us has a role to play in the path to progress and sustainable living.

We need to be sensitive to Environment, Social, and Governance (ESG) issues––which are crucial subject matters - while looking for wealth-creating investment opportunities.

Globally, institutional investors such as pension funds give a lot of importance to ESG parameters for making investments. The current climate is turning the spotlight on to the ESG theme. This is not just the topic of discussion in the developed economies in Europe and the US, but also perceived to be significant in Asia and emerging market economies.

The ESG theme is picking up in India too and Quantum Mutual Fund is already offering an open-ended equity oriented fund following Environment, Social, and Governance theme, Quantum India ESG Equity Fund.

You would agree that at a broader level, asset managers have a fiduciary responsibility while serving the interest of investors’ and community/society at large. And what’s reassuring is that in the recent years the availability of alternative ESG information, indicators, and tools have vastly increased enabling asset managers or fund managers to make better investment decisions in the endeavour to responsibly build wealth for investors in the long run.

Correspondingly, investors and society at large are turning conscious and socially responsible in making choices.

The Social dimensions - factors such as whether the company is making a positive impact on the lives of people and the community at large; whether it’s engaged in the business of tobacco, alcohol, controversial weapons and gambling operations; whether it’s taking stakeholder opposition in the right spirit; discharging its corporate social responsibility; the labour practices it follows, among many others–– is also pivotal function of ‘S’ in the ESG theme.

In a sensitive vein, these days, certain investors do not wish to have exposure to companies that inflict or violate health and safety issues to the society at large through their products and/or operations, and/or follow discriminatory labour practices.

Also, ‘G’ for Governance in ESG, looks at aspects such as the background of the founders, their values and vision as they run the organisation, the adeptness of the board, the independence of the board, and their freedom to speak up on important issues, executive compensation, amongst many others. Governance plays a key role, without which, everything can fall apart and progress in its true sense may never see the light of the day.


Note: For illustration purpose only

So, ESG investing is not purely a 'top-down approach' (as in case of other thematic funds), but also encompasses a ‘bottom-up approach’ to investing.

When a mutual fund scheme follows this theme, it sets the performance matrix accordingly; whereby it can measure the sustainability or the future preparedness of the companies under consideration, recognising their role in the larger community, the risk involved, the competitive advantage, while ultimately aiming to accomplish the stated investment objective of long-term capital appreciation.

Here are three key benefits of ESG investing:
1. Diversification – Unlike other sector or thematic funds, a good ESG Fund offers fair diversification among sectors with of course Environment, Social, and Governance aspects being the focus while constructing the portfolio of mainly equity and equity-related instruments of companies.
2. Better investment allocation – For an investor, ESG investing also offers an avenue for better investment allocation since it is a growth-oriented strategy of investing.
3. Potential to clock sustainable long-term returns – If the portfolio of an ESG Fund is well-constructed, comprising of companies offering a competitive advantage in the long-term, it can result in outperformance compared to its benchmark index. Additionally, ESG Fund gives highest priority to the material aspect of ESG along with financial aspects of the company that reduces downside risk further.

Thus, IFAs can recommend an ESG Fund to investors’ who are willing to embrace the trend of socially responsible investing and that reflects values and beliefs. It is about allocating hard-earned money in companies that follow sustainable practices, which in the long run is beneficial for the company, its investors, and the society at large.

That being said, do not assume that ESG investing is low on the risk-o-meter.

It is not.

In fact, it is high on the risk-o-meter.

This is because the fortune of an ESG Fund is closely linked to the fortune of the underlying theme.

Is it worth taking the risk?

Purely depends on the investors’ risk profile, broad investment objective, the financial goals being addressed, and the time horizon before the goal realises.

If the client/investor has the stomach for high risk, with the broader investment objective being capital appreciation, and the financial goal being addressed is 3-5 years from now, an ESG Fund can be a worthy addition to the portfolio.


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 September 30, 2019)

The Nifty 100 ESG Fund since the base date of April 1, 2011, has clocked a ‘total return’ of 10.9% CAGR as on September 30, 2019 a decent reward for investors.

Quantum India ESG Equity Fund portfolio provides allocation by diversifying across different sectors and market caps and thus, attempts to reduce the overall risk further.

The future of ESG investing...

An increasing number of investors are taking into account 'sustainability' as an important aspect of their portfolio; 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.

As an IFA, you too are an envoy of positive change for a cleaner, socially vibrant, and a responsible planet while you offer investment solutions to your clients.

“Be the change that you wish to see in the world.” – Mahatma Gandhi


This Article was authored by Mr. Jimmy Patel, MD & CEO Quantum Asset Management Company Pvt. Ltd. and was published in IIFL on November 27, 2019


Product Labeling
Name of the SchemeThis product is suitable for investors who are seeking*Riskometer
Quantum India ESG Equity Fund

(An Open ended equity scheme investing in companies following Environment, Social and Governance (ESG) theme)
• Long term capital appreciation

• Invests in shares of companies that meet Quantum’s Environment, Social andGovernance (ESG) Criteria
Quantum Long Term Equity Fund
Investors understand that their principal will be at High Risk
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.