Rating businesses weren’t impressed both. For occasion, Morningstar gave the fund a ‘below-average’ ESG ranking, the bottom ranking in that class. The remaining seven schemes by different funds in the identical class had been assigned both a ‘high’ or ‘above average’ ranking.
Morgan Stanley Composite Index (MSCI) additionally put Quant’s ESG fund among the many lowest-rated funds within the sustainability class. The world ranking company assigned Quant ESG ‘BBB’ ranking. All 5 different funds besides Kotak ESG Opportunities Fund and SBI Magnum ESG fund got an ‘A’ ranking.
Yet, Quant’s low ESG scores didn’t appear to hassle traders in any respect. And so, property beneath administration (AUM) of Quant ESG went up greater than 12 instances from ₹14 crore to ₹165 crore since its inception in 2020.
Quant ESG’s drawback was not confined to scores alone. Some of the shares chosen by the fund had been questionable. Adani Enterprises, a inventory that was largely accountable for the fund’s outperformance, has not been within the good books of ESG ranking businesses. Sustainalytics calls the corporate ‘high risk’ and ranked it final within the ‘traders and distributors’ class. MSCI assigned the inventory ‘laggard’ standing and pushed it to the underside of that class, and Crisil gave it a ‘below average’ ranking’.
According to Fisdom analysis, Quant MF and Surat-based NJ Mutual Fund had been the one asset administration firms (AMCs) that had a sizeable allocation to Adani group shares as of December 2022, earlier than the Hindenburg report on the group unleashed a storm within the Indian markets. Many institutional traders prevented Adani group shares, citing an absence of transparency. Quant ESG Fund, too, exited Adani Enterprises in August 2022.
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Is Quant ESG true to label?
To be certain, the notion of ESG firm can range. The ambiguity arises when there is no such thing as a single authority or method to resolve which firms are socially acutely aware and which aren’t. This has resulted in lots of ranking businesses giving reverse scores to the identical firm.
For occasion, Refinifitiv has ranked Reliance Industries Ltd (RIL) among the many prime 3 firms out of 204 companies within the ‘oil and gas’ sector, whereas Sustainalytics has categorized it beneath ‘severe risk’, the bottom rung.
MSCI calls Asian Paints a ‘leader’ in ESG however Sustainalytics sees the paints agency as ‘high risk’. MSCI additionally tagged Adani Ports a ‘laggard’ , the worst within the ESG class, whereas Sustainalytics ranked it probably the greatest on the earth.
Quant’s funding technique?
The scheme info doc (SID) explaining Quant ESG’s funding technique provides little readability on how the fund home filters shares. It mentions that the main focus will probably be on “the long run influence of ESG points moderately than unduly weighting elements at the moment occupying market consideration.”
This statement, however, does not explain the fund’s high churn rate. Quant ESG’s turnover ratio is 258% whereas the average turnover ratio in the category (excluding Quant ESG) is just 26%. Invesco India ESG fund has the second highest turnover ratio of 41%. Ideally, to reap the benefits of long-term ESG factors, fund managers hold stocks for a longer period and avoid frequent churning.
There is more to it than meets the eye. Mint found that the contents of the section ‘What are the investment strategies?’ in Quant’s SID are exactly the same as that of Axis ESG fund. But, despite having the same strategy, both the schemes have an overlap of just about 10%. Axis’s churn rate is a mere 24%. Strangely, for two funds that claim to follow the same framework for stock selection, they have two drastically different ways of deploying investor money.
The SID also states that “the investment strategy of the scheme 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.”
This assertion rings alarm bells since using phrases like ‘traditional fundamental, bottom-up financial analysis’ is in stark distinction with Quant AMC’s claims on managing investments. For starters, Quant AMC isn’t the standard fund home that invests utilizing elementary evaluation. Instead, it depends on VLRT, a posh data-driven framework, to purchase and promote shares. It reportedly spent greater than ₹180 crore on gathering information.
Mint additionally discovered that Quant AMC didn’t point out the VLRT framework wherever within the SID of its ESG portfolio whereas it was for the remaining 12 fairness schemes they run. Surprisingly, no holding within the ESG portfolio is exclusive, that means different schemes run by them have the identical shares. So, RIL is a recurring theme in all its MF schemes. In truth, all shares represented in Quant ESG funds have allocation in its different MF schemes, exhibiting a convergence in the best way shares are chosen.
Quant Mutual Fund didn’t reply to a questionnaire despatched by Mint until press time.
Nirav Karkera, head of analysis at Fisdom, mentioned that Quant is ESG from a really completely different perspective than what is usually accepted by most different mutual funds. “Along with a differentiated perspective, the ESG fund can be managed with comparatively larger agility. Such agility is seen throughout different portfolios as properly. In line with most of its funds, even the ESG fund reveals a comparatively larger churn,” mentioned Karkera. This may have led to its outperformance however one should take a more in-depth have a look at the fund home’s notion of ESG and if it nonetheless aligns with what an investor seeks from ESG-focused fund, he added.
While the scores assigned to the fund is dismal, there is no such thing as a actual gold normal when it comes to ESG norms, particularly within the Indian context. International ranking businesses’ methodology will not be straight relevant to Indian firms contemplating the distinction in working and regulatory atmosphere, in ESG context particularly.
Investor security
ESG investing is getting more and more fashionable within the nation and there’s strain available on the market regulator to keep away from ESG mutual funds from turning right into a advertising gimmick. In current instances, accountable investing has gained momentum and, notably, seven of the ten ESG mutual funds had been launched in simply the previous three years.
Subsequently, the securities trade board of India (Sebi) got here out with session stories on three fronts: ESG disclosures, scores, and investing.
On ESG investing, Sebi has proposed stricter disclosure norms to make sure that mutual funds are staying true to their tag. The regulator has sought readability on the type of ESG technique the fund is following, affordable assurance from a 3rd occasion as as to if the fund is following its said technique, adhering to disclosure on votes forged on firm resolutions, and is sustaining case research on portfolio firms, amongst others .
Further, Sebi has proposed 5 sub-categories for ESG fund administration. This means AMCs can be allowed to launch a number of ESG schemes following completely different methods if the proposals turn out to be regulation.
Also, fund managers can be required to clarify the fund’s ESG technique on an annual foundation, how they have interaction with holding firms, escalations raised by the fund supervisor to firms, and particular feedback on the underlying firms.
Sebi is making an attempt to nudge ESG ranking suppliers (ERPs) to think about the home context whereas ranking firms. For this, they are going to want a novel set of metrics that may be measured within the Indian context.
Sebi can be making an attempt to enhance the standard of information coming from corporates. Among different issues, Sebi needs to uncover the ESG practices of an organization’s provide chain contributors and make audited disclosure for a set of ESG metrics obligatory. This will probably be carried out in a phased method, beginning with the highest 1,000 firms primarily based on market capitalization.
Till such time although, many fund managers will contemplate ESG to be simply one other trick to lure traders within the title of accountable investing. Many fund managers additionally argue that socially accountable filters will be utilized to present funds and that there is no such thing as a must create a separate ESG fund.
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Updated: 28 Jun 2023, 11:57 PM IST
