Aditya Birla Mutual Fund has launched an NFO (New Fund Offering) for an active equity fund called the Aditya Birla Sun Life ESG Fund. The NFO is open from 4th Dec to 18th Dec 2020. We took a look to see if it makes sense for investors.
Short Answer: No. Yet another ESG fund launch. We recently wrote about the Kotak ESG Opportunities Fund. While the core idea with this fund is the same, the Aditya Birla Sun Life ESG Fund presents a more compelling marketing pitch for ESG investing, which doesn’t quite stand up to scrutiny.
Read on for our take on the Aditya Birla Sun Life ESG Fund NFO.
ESG: The not-so-new kid on the block
A quick primer on what ESG investing is about. ESG stands for Environment, Society, and Governance. ESG Investing is therefore about investing in, or rather eliminating companies that, through the course of their business, demonstrate negative environmental or societal impact. The hypothesis is that socially responsible, environmentally-friendly, ethical firms deliver superior risk-adjusted returns compared to the market.
This idea has been around for decades and has been long adopted by large pension funds as one of the criteria for their asset managers to consider. This means assets worth Trillions of USD are managed with some reference to the ESG theme.
Where there is demand, there is supply. Not surprisingly, the NSE has two ESG Indices called the NIFTY 100 ESG Index, and the NIFTY 100 Enhanced ESG Index.
Here’s how the NIFTY 100 ESG index picks companies:
- Designed to reflect the performance of companies that are part of NIFTY 100 index, based on Environmental, Social and Governance score
- The companies that are involved in any major Environmental, Social or Governance controversy shall not be considered for selection in the index
- Companies engaged in the business of tobacco, alcohol, controversial weapons and gambling operations shall be excluded
- Sector weights are based on free float market cap. Each index constituent within sector is tilt weighted based on ESG score and is capped at 10%
Aditya Birla Sun Life ESG Fund in a nutshell
The new fund from Aditya Birla Sun Life is an active equity fund that will benchmark against the NIFTY 100 ESG Index.
From the Scheme Information Document:
“The investment objective of the Scheme is to generate long-term capital appreciation by investing in a diversified basket of companies following Environmental, Social and Governance (ESG) theme.”
Investment Strategy
“The Scheme will invest in a basket of securities based on combining existing traditional fundamental, bottom-up financial analysis along with an analysis on the environmental, social and governance aspects of the company. The ESG analysis will be a part of the investment framework which may also use data shared by external service providers & index providers.
The fund manager would combine existing traditional fundamental, bottom up financial analysis while also considering the environmental, social & governance aspects of a company (basis internal & external scores) so as to identify long term sustainable business opportunities.
As a part of the framework to shortlist ESG compliant companies, the ESG process will be assessed and executed at various levels. There would Sector Level screening, stock level screening and further some steps to portfolio construction. ESG scores for each portfolio company shall be an integral part of the investment research process.”
Should you invest in the Aditya Birla Sun Life ESG Fund?
The apparent case for ESG factors in an investment framework
The product presentation for this fund makes a compelling case with examples for how lapses on each of the three pillars (Environmental, Society and Governance) can result in significant impact to business and therefore shareholder returns.
Source: Product Presentation
They even added examples of Indian companies that highlight examples where non-compliance created business risk
As far as pitches go, this is nicely done. Especially using real-world recent company examples to highlight problem companies.
What gets measured gets managed
The problem is in the implication that an ESG investment framework would have avoided these in advance. Not quite.
Since the India examples slide uses all but one identifiable examples i.e. Jockey’s Indian partner – Page Industries, take a look at it’s sustainalytics ESG risk score
Source: sustainalytics
Lower the risk score, better the company for ESG-led investing. For reference, HDFC Bank scores 28 (medium-risk) on this framework.
So would an ESG framework have effectively helped avoid the risk of being invested in an “at risk” company?
We are not picking on the ESG framework in particular. Any third-party framework relying on public and self-reported data is susceptible to be gamed.
The World Council for Corporate Governance bestows an annual award called The Golden Peacock Award for Corporate Governance. Recent winners include Grasim, Rockwell Automation. Company PR and IR teams proudly publish such accolades.
Satyam (one of the largest corporate accounting frauds in the last two decades) won that same award just three months before the disclosure in 2008 that its books had been fabricated for years.
Evaluation systems and frameworks are only as good as the quality of information being fed into them.
The uncertain link between ESG and Stock Returns
The NIFTY 100 ESG index has outperformed the NIFTY in 7 out of the last 8 years. See chart below from another new ESG fund’s presentation.
Source: Kotak ESG Opportunities Fund Presentation
But remember the NIFTY ESG Index was only formed in 2018, and back-filled till 2011. The ESG index outperformed in 6 out of the 6 years when looking back, and outperformed in 1 out of the 2 years since.
And continuing with our specific example.
Chart below shows how the market reacted to the Page Industries human rights violation allegation.
Of course, the fact that the stock price is up 16% since the adverse news doesn’t mean investors should have ignored it. But if the core stock selection criteria for the fund would have a) not have reflected such a risk and b) which then would not have impacted stock prices, then what value is the ESG framework adding?
Should I invest in this NFO?
No.
At first glance, it appears that applying an ESG-risk score to avoid companies is a good idea. Dig deeper though, and it appears ESG is a catchy label with little differentiation under the hood.
If the framework is an effective negative list of stocks to avoid, why not incorporate it into existing active strategies as opposed to starting a new fund with the moniker? Does this mean other funds will invest in companies flagged for ESG non-compliance but this one won’t?
Shorn of the ESG label which we don’t think adds much to the investment process, the fund looks like just like any other active equity fund from the fund house. There are other better multicap funds with proven performance and track record investors should consider instead.
Disclaimer: Since we are active asset managers running a PMS, with quantitative and bottom-up fundamental portfolios, our views on equity and other mutual funds will reflect our bias.
