Ever since the Indian government had introduced a national level cleanliness movement- “Swachh Bharat Abhiyan“- with an aim to clean length and breadth of the country, provide cleaner natural resources, improve hygiene and health and contribute towards achieving the sustainable development goal established by the United Nations in 2015, along with the rising global warming leading to climate change has made everyone conscious of being responsible towards ecological crisis.
Recently in June the home minister pointed out that the climate change has impacted the world and only greenery is the solution to this crisis and launched a tree plantation campaign (Vriksharopan Abhiyan). Plus, he inaugurated and laid the foundation stone of six eco-parks and tourism sites.
Such instances are making the companies focus on sustainability and follow Environment, Social, and Governance (ESG) factors for their growth and additionally taking Corporate Social Responsibility (CSR) projects.
Besides in the recent past, the increasing incongruencies in corporate governances have also surfaced. Slowly the investors are also consciously embracing ‘socially responsible investing’, when investing their hard-earned money.
While looking at this 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.
ICICI Prudential Mutual Fund is the latest fund house that has decided to offer investors potential long-term performance advantages with ICICI Prudential ESG Fund. It is an open-ended equity scheme investing in companies following Environment, Social, and Governance (ESG) theme.
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 “EVERYTHING SHOULD BE GOOD” – This builds confidence both while investing and way of living “.
Image 1: ICICI Prudential ESG Fund’s Score board of stock selection
(Source: Fund’s presentation)
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.
The focus would be on identifying businesses which reflects the strength and stability of the companies based on High ESG score.
But, in terms of risk-return matrix, being a thematic fund, ICICI Prudential ESG Fund involves extremely high risk, if the portfolio is highly concentrated, and hence it is a very-high-risk high-return investment proposition.
Table 1: Details of ICICI Prudential ESG Fund
| Type | (An open ended equity scheme investing in companies identified based on the Environmental, Social and Governance (ESG) theme) | Category | Thematic fund |
| Investment Objective | To generate long-term capital appreciation by investing in a diversified basket of companies identified based on the Environmental, Social and Governance (ESG) criteria However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved. |
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| Min. Investment | Rs 5,000 and in multiples of Re 1 thereafter | Face Value | Rs 10 per unit |
| Plans |
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Options |
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| Entry Load | Nil | Exit Load |
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| Fund Manager |
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Benchmark Index | Nifty 100 ESG TRI |
| Issue Opens: | September 21, 2020 | Issue Closes: | October 5, 2020 |
(Source: Scheme Information Document)
How will the scheme allocate its assets?
Under normal circumstances, it is anticipated that the asset allocation of the scheme will be as follows:
Table 2: ICICI Prudential ESG Fund ‘s Asset Allocation
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | ||
| Equity & Equity related instruments of companies identified based on the Environmental, Social and Governance (ESG) criteria | 100 | 80 | High |
| Other Equity and Equity related instruments | 20 | 0 | High |
| Debt and Money market instruments, Units of Debt oriented mutual fund schemes and term deposits (margin money) | 20 | 0 | Low to Medium |
| Units issued by REITs and INVITs | 10 | 0 | Medium to High |
| Preference shares | 20 | 0 | Medium to High |
The Scheme may also take exposure to:
- Derivative instruments to the extent of 50% of net assets.
- Stock lending up to 20% of net assets.
- Securitised debt up to 50% of debt portfolio.
- Structured obligations up to 50% of the debt portfolio
- ADR /GDR/ Foreign Securities / Overseas ETFs up to 30% of the net assets. Investment in ADR/GDR/Foreign Securities/ Overseas ETFs would be as per SEBI Circular dated September 26, 2007, as may be amended from time to time.
The Scheme may invest up to 20% in companies which may not qualify as per ESG criteria.
(Source: Scheme Information Document)
What is the Investment Strategy?
The stock selection will be based on Environmental, Social & Governance (ESG) aspects of the companies. The endeavour of the Scheme would be to follow ESG parameters which can impact or pose risks to the long-term sustainability of the business, delve deeper into a company’s management practices, culture and risk profile which would thereby help in understanding the impact on long term investors.
The Scheme shall invest in stocks which are forming part of the benchmark index and/or stocks in our research coverage, based on ESG scores.
During the internal research process, each company shall be assigned an ESG score based on their policies, processes and practices with regards to environment, social development and corporate governance. To arrive at an ESG score, the AMC shall use various publicly available information and / or data shared by external service provider. For companies which lack data/information (in case of IPO), the fund manager and research analysts shall carry out internal research by engaging with the company or collecting information through public sources.
The Scheme shall rebalance the portfolio in case of any review / deviation to the asset allocation. Such rebalancing shall be done within 30 days from the date of occurrence of review / deviation. In the event of the Scheme not being rebalanced within the aforesaid period, justification for the same shall be placed before Investment Committee of the AMC and reasons for the same shall be recorded in writing. Investment Committee shall then decide on the course of action and may suggest rebalancing of the portfolio.
The portfolio shall be reviewed and rebalanced on periodic basis due to change in ESG score of a particular stock forming part of the Scheme’s portfolio. The Fund Manager may at his discretion carry out ad-hoc rebalancing in case of adverse news/information about the stock forming part of the Scheme’s portfolio.
Who will manage the ICICI Prudential ESG Fund?
Mr Mrinal Singh is the dedicated Fund manager of the scheme, but the overseas investments of the scheme will be managed by Ms Priyanka Khandelwal.
Mr Mrinal Singh is associated with ICICI Prudential Asset Management Company Limited since June 2008. He has done his Mechanical Engineering and Post Graduation Diploma in Management with a specialization in Finance. He has an overall work experience of 17 years.
Before joining ICICI Prudential AMC Mr Mrinal was associated with Wipro Ltd – IT Services for 3 years and BOSCH India (erstwhile MICO) – R&D for 2.5 years.
At present Mr Mrinal manages ICICI Prudential Focused Equity Fund, ICICI Prudential Dividend Yield Equity Fund, ICICI Prudential Growth Fund – Series 2, ICICI Prudential Bharat Consumption Fund – Series 2, ICICI Prudential Value Discovery Fund, ICICI Prudential Retirement Fund – Hybrid Aggressive Plan, Hybrid Conservative Plan, Pure Equity Plan and Pure Debt.
Ms Priyanka Khandelwal, as mentioned earlier, will manage the overseas investments of the Scheme. She joined ICICI Prudential Mutual Fund in October 2014 and has to her credit a bachelor’s degree in commerce (B. Com), plus is a Chartered Accountant and Company Secretary by qualification. At present, Ms Khandelwal also manages ICICI Prudential US Bluechip Equity Fund and ICICI Prudential Global Stable Equity Fund.
The outlook for ICICI Prudential ESG Fund
The awareness about ESG issues has grown considerably. Day-by-day, there is a rise in number of investors that are consciously considering ‘sustainability’ as an important aspect of their portfolio while they aspire to be socially responsible investors. Globally, ESG theme of investment is mature and forms a significant part of investors portfolio, especially in Europe and the US.
Even in India, after the recurring Delhi smog, piles of plastic pollution on beaches sighted, Ganges water getting frosty, etc. started affecting the health of individuals is making companies take more conscious effort to improve their ESG practices. This ESG move has seen a new set of companies that cater exclusively to sustainable and organic living foraying in to the markets.
Besides, the pandemic that has made lives come to standstill was a blessing for the ecology. It allowed nature to fix itself and thrive. So, the focus has shifted to adopt ESG investing although the concept is at a very nascent stage and unexplored. But due to growing awareness of the benefits and need for it, the fund house is of the view that there are opportunities which the ICICI Prudential ESG Fund will capture to provide good returns for investors.
In order to achieve the intended objective of the scheme, the fund managers will actively manage the portfolio with focus on ESG scores.
Image 2: ICICI Prudential ESG Fund’s probable investment strategy at a glance
(Source: Fund’s presentation)
Hence how the fund managers construct the portfolio in current 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 ICICI Prudential ESG Fund will be closely linked to how well the fund managers assess the scenarios and risk management measures they adopt.
This article first appeared on PersonalFN here
