In the year 2019 and the beginning of 2020, India experienced extreme weather conditions. There was a severe summer, delayed monsoon, cyclones in the nearby waterbodies that led to incessant rainfalls and inundations, smog and an extreme drop in winter temperatures. All of this points to drastic climatic change and global warming.
The global warming crisis is a bigger threat for the ecology and for our existence. Sensing this worldwide, companies are focusing on sustainability and following Environment, Social, and Governance (ESG) factors for their growth.
Thankfully, the private sector is now recognising the importance of this larger goal. In addition to taking Corporate Social Responsibility (CSR) projects, many of them are even making conscious investment choices, turning sensitive to Environment, Social, and Governance (ESG), which are crucial subject matters.
We’ve seen that when investing their hard-earned money, investors are consciously embracing ‘socially responsible investing’. In the recent past, increasing incongruencies in corporate governances have also surfaced.
While looking at the paradigm shift of investors, a sensitive approach to Environment, Social, and Governance (ESG) issues are crucial subject matters while looking for wealth-creating investment opportunities, and only few fund houses have launched ESG themed funds.
Axis Mutual Fund is the latest fund house that has decided to offer investors potential long-term performance advantages with Axis ESG Equity Fund. It is an open-ended equity scheme investing in companies following Environment, Social, and Governance (ESG) theme.
With the launch of Axis ESG Equity Fund, the fund house shows its support to the mass movement for cleanliness and sustainability and takes a step forward towards ensuring that investments flow into greener and cleaner businesses.
What is an ESG fund?
ESG fund is an open-ended thematic fund that will invest in companies that are sustainable, using an approach that incorporates Environment, Social, and Governance (ESG) factors and their impact throughout the investment process.
Environment, Social and Governance are vital facets of the larger ecosystem we live in. Sensibly handling environment and social issues, like global warming, pollution control is essential in the path to progress and sustainable living. Governance also plays a key role, without which everything can fall apart and progress in its true sense may never see the light of the day.
For example, a company with lower carbon emission would be a better company than a polluter as it will face lower regulatory or societal risk. So, its shares would be less volatile over time and will provide better returns, if invested in it.
A perfect way to put it would be, finance without sustainability is a disastrous recipe for environment and society.
ESG funds are slowly been considered and gaining popularity among investors including FIIs who want to be seen to be contributing towards reducing global warming, along with value additions to human development and without compromising on financial returns.
Depending on the ESG score, a stock is selected to invest while creating a portfolio of such a scheme. A higher score of a company indicates “cleaner and greener business”.
Environment, Social, and Governance (ESG) factors are three pillars that encompass lot of issues that impact the overall performance of the company and its growth.
Illustration 1: Each pillar captures several issues
(Source: Axis ESG Equity Fund presentation)
So, based on the ESG factors, fund managers gain an insight into the quality of a company’s management, culture, risk profile, and other characteristics. By adding this increased level of scrutiny associated with ESG analysis is helpful in creating a portfolio that will create potential gains.
The focus would be on businesses that will ensure sustainable management of natural and human resources, have a diverse organisational structure, prudent management, and follow a socially responsible framework of business.
Illustration 2: Strong ESG Indicates Responsible Framework Of Business
(Source: Axis ESG Equity Fund Product Leaflet)
But in terms of risk-return matrix, being a thematic fund, AESGEF involves extremely high risk if the portfolio is highly concentrated; and hence, it is a very-high-risk high-return investment proposition.
However, note that since the approach is focused on ESG parameters, the scheme is value agnostic to form a well-diversified portfolio of stocks from various sectors and across market capitalisation.
Hence, it’s noteworthy that given the positive characteristics of ESG investing, it can outweigh the risks in the long-term and prove to be a rewarding experience. Thus, AESGEF is suitable only for investors who have a high-to-very high-risk appetite and an investment horizon of at least 5 years.
Table 1: Axis ESG Equity Fund Details
|An open-ended equity scheme
|Thematic (following Environment, Social and Governance (ESG) theme)
|To generate long term capital appreciation by investing in a diversified portfolio of companies demonstrating sustainable practices across Environmental, Social and Governance (ESG) parameters.
However, there can be no assurance that the investment objective of the Scheme will be achieved.
|Rs 5,000 and in multiples of Re 1 thereafter.
|Rs 10 per unit
|Mr Jinesh Gopani and Mr Hitesh Das
|Nifty 100 ESG TRI
|January 22, 2020
|February 05, 2020
(Source: Scheme Information Document)
How will the scheme allocate its assets?
The asset allocation under the Scheme, under normal circumstances, will be as follows:
Table 2: AESGEF’s Asset Allocation
|Indicative Allocations (% of total assets)
|High/ Medium/ Low
|Equity and Equity related instruments of companies with favourable Environmental, Social and Governance (ESG) criteria
|Other Equity and Equity related instruments
|Debt & Money Market instruments
|Low to Medium
|Units issued by REITs & InvITs
|Medium to High
(Source: Scheme Information Document)
What will the Investment Strategy be?
The investment strategy of the Axis ESG Equity Fund will be to invest in a basket of securities based on combining existing traditional fundamental, bottom-up financial analysis along with a rigorous analysis on the environmental, social and governance aspects of the company.
The ESG analysis will be based on a comprehensive ESG framework adopted from some of the global best practices. The ESG process will be executed at various levels.
- Sector level screening: The scheme will exclude sectors/themes that are deemed harmful from a societal perspective. The fund managers and their team will avoid investment in companies operating in those industries and maintain that exclusion on an on-going basis.
- Stock level screening: Apart from sector exclusion list, the fund managers and their team will not invest in stocks which throw up ESG red flags as a part of our review, even if the company is from a sector that is not a part of exclusion list.
- Portfolio Construction: The fund managers believe that evaluating a company from an ESG perspective requires a detailed qualitative approach that should complement our existing fundamental based investment process workings rather than a simplistic standalone scoring-based inclusion/exclusion matrix for individual stocks.
The fund managers with their teams intend to be active owners of the companies in which they will invest and to reflect environmental, social and governance (ESG) value drivers within the investment process by following below steps.
Step 1: Initial detailed ESG assessment of every company at the time of its inclusion in the investment universe will be carried out. The assessment will be based on a detailed sector-specific questionnaire that will be completed by the analyst in discussion with the company. Thus, every company will undergo a detailed ESG due diligence in addition to the fundamental groundwork before entering the universe.
Step 2: Annual on-going detailed assessment and evaluation of ESG issues or concerns will be carried out periodically to ensure that changes to the operating environment are captured. In case of any concerns on ESG front indicating any risk that may be detrimental to the long-term shareholder value or in case of no evidence of any steps taken to strengthen safety measures, may lead to exclusion of the security from the universe.
Step 3: In case of any specific ESG issue facing the company, a detailed review of the same to be carried out by the analyst and the impact discussed with the company management.
Step 4: Active engagement with the company management, ownership in terms of improved disclosure of ESG matters and voting on proxy items keeping ESG aspect in mind.
While the more traditional financial indicators and the analysis of business strategy form the basis of investment decisions, ESG factors may impact the investments in two ways – first through size of position given its impact on the inherent risk to our financial forecasts and secondly through our view of the ultimate long term value of company based on its readiness to face some of these issues, from both an upside and downside perspective. We will primarily focus on the longer-term impact of ESG issues rather than unduly weighting factors which are currently occupying market attention.
Who will manage the Axis ESG Equity Fund?
The Axis ESG Equity Fund will be managed by Mr Jinesh Gopani and Mr Hitesh Das.
Currently, Mr Jinesh Gopani is the Head of Equities at Axis Asset Management Co. Ltd. He has been associated with Axis Asset Management from October 2009.
He holds a bachelor’s degree in commerce (B. Com) and a degree in Master of Management Studies (MMS) from Bharati Vidyapeeth Institute of Management Studies and research.
He has a work experience of over 16 years in Equity Research and Fund management. He worked as a Research Analyst for 2 years with Net worth Stock Broking Ltd, then joined Emkay Share & Stockbrokers Ltd. as Research Analyst for 4 years. Further, he joined Voyager India Capital Pvt. Ltd. for 2 years as Research Analyst and Portfolio Manager. Thereafter, he was with Birla Sun Life Asset Management Company Ltd as a Portfolio Manager for 2 years before joining Axis Mutual Fund.
Some of the other Equity schemes he manages are Axis Focused 25 Fund, Axis Emerging Series 1 (1400 Days), Axis Emerging Series 2 (1400 Days), Axis Long Term Equity Fund, Axis Multi-cap Fund, Axis Growth Opportunities Fund and Axis Retirement Savings Fund.
Mr Hitesh Das has to his credit a B.Tech, M. Tech followed by PGDM. He manages investments under ADRs/GDRs and other foreign securities at the fund house.
He has a work experience of over a decade as an Equity Research Analyst, wherein he was associated with Yes Bank as a Risk Analyst for a year. Later he joined Ebusinessware (India) Pvt. Ltd as an Equity Research Analyst for a brief term. Thereafter he joined Credit Suisse Securities (India) Pvt. Ltd. as an Equity Research Analyst for 1.5 years, followed by his association with Barclays Securities India Pvt. Ltd as Equity Research for 4 years before joining Axis Mutual Fund.
The outlook for Axis ESG Equity Fund.
The awareness about ESG issues has grown considerably. An increasing number of investors are consciously considering ‘sustainability’ as an important aspect of their portfolio while 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. Globally, ESG theme of investment is mature and forms a significant part of investors’ portfolio, especially in Europe and the US.
Graph: ESG Gaining Momentum
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 December 31, 2019)
But recently in India too, due to corporate governance issues, the focus has shifted to adopt ESG investing. Also, in recent years, the availability of alternative ESG information and tools has vastly increased to assist in worthy decision making that can, in turn, go on to build long-term wealth for investors. And even the research findings show that cleaner and greener businesses are potential wealth creators.
Axis ESG Equity Fund to achieve the stated objective of the scheme will construct portfolio that will reflect both growth and sustainability based on standardized ESG assessment. And will invest upto 30% in global sustainable companies.
Illustration 3: Indicative structure of Portfolio
(Source: Axis ESG Equity Fund presentation)
How the fund managers construct the portfolio in current turbulent times remains to be seen despite the various filters they will use to pick stocks as it is a challenging task. Thus, the fortune of the Axis ESG Equity Fund will be closely linked to how well the fund managers and their team assess the scenarios and risk management measures they adopt.
This article first appeared on PersonalFN here