Invesco Mutual Fund is throwing its hat in the Environmental, Social and Governance (ESG) thematic fund space with a new fund offer (NFO). Invesco India ESG Equity Fund NFO, an actively managed equity scheme investing in companies following ESG theme, will open for subscription on February 26 and close on March 12. This will be the 10th fund in the ESG segment. Read on to know more details about investment strategy and ESG fund suitability for your portfolio.
ESG – What it is all about
Climate change, burgeoning pollution, resourceâ€™s scarcity, inequality, among others are some of the defining issues of our time. Some companies are increasingly focusing on ESG initiatives as businesses face a new set of challenges in todayâ€™s socially conscious economy.
With risks emanating from the environment, social and governance (ESG) factors are increasing; it is important to assess where the company faces risk on account of ESG parameters as ignoring these risks can have far reaching consequences, including impact on the shareholder value.
ESG issues can impact companyâ€™s positioning and have financial impacts. In the past, continuity of several businesses has been risked due to disregarding ESG practices, which in turn impacted their business operations, reputation and the shareholder value.
Invesco India ESG Equity Fund
The new fund will ultimately buy 30-40 stocks and hope these ESG compliant shares will appreciate over time. The selection of the 30-40 stocks will be done on the basis of ESG risk score evaluation of each company.
Companies involved in thermal coal extraction, unconventional oil & gas extraction (shale oil, shale gas, and Arctic drilling), power production based on coal, unconventional weapons (including nuclear weapons systems, biological weapons etc.), tobacco â€“ production & trading, and gambling are excluded from such a portfolio.
The portfolio will invest primarily in largecap stocks. There will be limited exposure to midcap and smallcap stocks, which may have 35 per cent allocation of overall portfolio.
The portfolio will be a blend of growth and value stocks.
Plans/Options – Growth Option, Dividend Option
Minimum investment – Rs 1,000
Exit load – For any redemption / switch out in excess of 10 per cent of units allotted within one year from the date of allotment, there will be load of one per cent. If units are redeemed/switched out after one year from the date of allotment, there will be zero load.
Fund manager – Taher Badshah and Amit Nigam
Benchmark – NIFTY100 Enhanced ESG TRI
Problem with ESG investing
If investors turn towards environmentally-friendly or socially-friendly stocks, they push up the prices and lower their expected returns. Investors are saying that the choice has its own reward and expect that they are going to get higher returns from doing that but that may not really happen.
People may pay more for products that are produced in an environmentally friendly way but it is yet to be seen, over the long-term, if the same will pay more for stocks that belong to companies that stick to ESG principles. For instance, the NIFTY100 ESG index has a price to earnings of 40 times and price to book of 4.78 times compared to Nifty 100’s price to earnings of 36.9 times and price to book of 3.9 times (Jan-2021 end figures).
Suitability of ESG fund
ESG funds should not be a part of your core allocation. Hence, give them a place in your satellite allocation alone.
Both Axis and ICICI Prudential ESG funds can invest in global companies with high ESG scores. This adds another feature as well as risk to such funds.
There is not enough compelling evidence that the ESG theme is worth investing more than what you can give to a normal thematic fund (maximum 5 per cent).
In India, ESG funds are relatively new and hence should stand the test of time before they merit more seriousness.