Should you stay invested in SBI Magnum’s ethical version?

SBI Funds Management Ltd, India’s fifth largest fund house, has acquired a conscience, or so it wants us to believe. Effective 16 May, one of its diversified equity schemes, as the fund house puts it, is investing responsibly. SBI Magnum Equity Fund will be known as SBI Magnum Equity ESG (environment, social and governance) Fund, and will be the only fund in the Indian mutual funds industry to invest in companies that follow the ESG criteria. So what makes it unique?

Conscientious Investing…

A fund manager typically picks up a company based on fundamentals, profit and loss, revenue sustainability, management’s quality and so on.

Some schemes want to look beyond: does the company practice gender equality? does its manufacturing process damage the environment? Such schemes want companies to be ethical, responsible and to contribute to society not just by manufacturing products and making profits.

“We are committed towards the ESG principle of investing. Although just SBI Magnum Equity ESG fund will follow the principle, we rate all companies we track, on their ESG performance. We have been doing this for the past five years,” said Navneet Munot, executive director and chief investment officer, SBI Funds Management Co. Ltd.

Although new to India, the ESG concept is popular abroad. As per Morningstar Inc., assets under management of ESG-focused funds went up to $6 trillion by 2014-end, up from $3.7 trillion in 2012. Passively-managed funds like exchange-traded funds (ETF) also track this space and invest in indices that consist of companies that follow the ESG principle. At the end of April 2018, there were 150 ESG-focused ETFs with assets of over $18.6 billion, up from 59 such ETFs in 2015 with assets of $5.92 billion, according to etfgi.com, a UK-based research and consultancy firm specialising in ETFs.

Jon Hale, director-sustainability research, Morningstar, insists that ESG is not hokus-pokus. He said, “The main thrust of ESG analysis is that it alerts investors to issues that may not yet be recognised by traditional analysts as material to a company’s value.”

Munot said SBI Magnum ESG won’t pick liquor and tobacco companies, and will also avoid companies that are in the defence and mining space.

…or just a gimmick?

SBI Funds may have all the right intentions, but it is a long road ahead.

In April 2007, ABN AMRO mutual fund (now, BNP Paribas Asset Management India Ltd) launched India’s first socially responsible investing (SRI) fund called ABN AMRO Sustainable Development Fund. The 3-year closed-end scheme collected just around Rs58 crore (as per Value Research). After its tenure got over in April 2010, it converted into an open-ended fund, but didn’t find too many takers and was eventually merged into ABN AMRO Equity Fund in August 2011. The fund house didn’t launch a similar scheme.

For its SRI fund, the fund house had tied up with Crisil Ltd that had devised a methodology to identify companies with a high SRI score by sending detailed questions to companies. Nikhil Johri, who headed ABN AMRO mutual fund in those days told us that here’s where the scheme faulted as not many companies participated in the exercise.

This is also why Shyam Sekhar, chief ideator and founder, iThought, said it’s premature to launch such schemes in India. “I don’t think Indian fund houses are ready to do this yet. Their ability to take feedback from stakeholders on these issues has never been adequately demonstrated. They have shown little or no initiatives in fulfilling fiduciary shareholder responsibility,” he said.

Also, an ESG fund may not want to invest in a firm just because it works in a so-called socially acceptable sector. InGovern Research Services Pvt. Ltd, a proxy advisory firm recently did a study on the ESG standards of consumer goods where it rated a total of 16 companies, including Nestle India Ltd, Godrej Consumer Products Ltd, Emami Ltd, and Britannia Industries Ltd.

While 14% of these companies got a “high scoring”, 36% got a “below average” score and 14% got a “low” score. InGovern is yet to publish this report but shared it exclusively with Mint.

What should you do?

Some experts are hopeful that SBI Magnum Equity ESG Fund will pave the way for others. “Unless a fund house starts such a scheme, talks about it and educates and sensitised investors, how will this market grow?”said Amit Tandon, founder and managing director, Institutional Investor Advisory Services (IiAS), a proxy advisory firm.

Johri, chief investment officer of Trivantage Capital Management India Ltd, a Sebi-registered portfolio management firm that he founded, remains sceptic. “Somehow, investors think that if they involve ESG concept in investments, their returns would be compromised.”

Existing investors of SBI Magnum Equity ESG Fund should switch to the fund house’s more successful large-cap fund, SBI Bluechip Fund since a diversified fund is what they had asked for. Those who wish to get a taste of ESG concept can stay invested. Remember, it’s a thematic fund and should not be part of your core portfolio.

ShriramSubramanian

Founder and managing director, InGovern Research Services

Companies need to be responsible

Companies need to increasingly adopt best practices as far as ESG is concerned. They have to communicate their practices to investors through disclosures. Investors in Indian companies need to put more pressure on companies to adopt market leading ESG practices and disclosures.

JonHale

Director of sustainability research, Morningstar

Analysing ‘ethics’ alerts investors

The main thrust of ESG analysis is that it alerts investors to issues that may not yet be recognised by traditional analysts as material to a company’s value… throughout the world, younger investors say they want to invest this way, and typically women have higher interest than men.

NikhilJohri

Chief investment officer and founder, Trivantage Capital Management

Some think ESG affects returns

Most Indian investors are focused on returns; they think if they involve ESG concept in investments, then their returns would be compromised… In Europe, ESG funds are very popular; companies take pride in their ESG score and the emphasis is on doing business the right way.

Link: Mint- May 31, 2018