ESG label has loopholes, have a look at Quant ESG Fund

Rating businesses weren’t impressed both. For occasion, Morningstar gave the fund a ‘below-average’ ESG score, the bottom score in that class. The remaining seven schemes by different funds in the identical class have been assigned both a ‘high’ or ‘above average’ score.

Morgan Stanley Composite Index (MSCI) additionally put Quant’s ESG fund among the many lowest-rated funds within the sustainability class. The international score company assigned Quant ESG ‘BBB’ score. All 5 different funds besides Kotak ESG Opportunities Fund and SBI Magnum ESG fund got an ‘A’ score.

Yet, Quant’s low ESG scores didn’t appear to trouble traders in any respect. And so, belongings underneath administration (AUM) of Quant ESG went up greater than 12 occasions from ₹14 crore to ₹165 crore since its inception in 2020.

Quant ESG’s downside was not confined to scores alone. Some of the shares chosen by the fund have been questionable. Adani Enterprises, a inventory that was largely liable for the fund’s outperformance, has not been within the good books of ESG score 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’ score’.

According to Fisdom analysis, Quant MF and Surat-based NJ Mutual Fund have been the one asset administration corporations (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 make sure, the notion of a superb ESG firm can fluctuate. The ambiguity arises when there isn’t any single authority or method to resolve which corporations are socially aware and which aren’t. This has resulted in lots of score businesses giving reverse scores to the identical firm.

For occasion, Refinifitiv has ranked Reliance Industries Ltd (RIL) among the many high 3 corporations out of 204 companies within the ‘oil and gas’ sector, whereas Sustainalytics has categorised it underneath ‘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 top-of-the-line on the planet.

Quant’s funding technique?

The scheme info doc (SID) explaining Quant ESG’s funding technique offers little readability on how the fund home filters shares. It mentions that the main focus can be on “the long run impression of ESG points slightly 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 the usage of phrases like ‘traditional fundamental, bottom-up financial analysis’ is in stark distinction with Quant AMC’s claims on managing investments. For starters, Quant AMC just isn’t the standard fund home that invests utilizing basic evaluation. Instead, it depends on VLRT, a fancy 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 anyplace 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, which 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, displaying a convergence in the way in which 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, stated that Quant is taking a look at ESG from a really totally different perspective than what is mostly accepted by most different mutual funds. “Along with a differentiated perspective, the ESG fund can also be managed with comparatively increased agility. Such agility is seen throughout different portfolios as nicely. In line with most of its funds, even the ESG fund reveals a comparatively increased churn,” stated 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 isn’t any actual gold normal when it comes to ESG norms, particularly within the Indian context. International score businesses’ methodology will not be instantly relevant to Indian corporations contemplating the distinction in working and regulatory setting, in ESG context particularly.

Investor security

ESG investing is getting more and more fashionable within the nation and there may be strain in the marketplace regulator to keep away from ESG mutual funds from turning right into a advertising and marketing gimmick. In current occasions, accountable investing has gained momentum and, notably, seven of the ten ESG mutual funds have been launched in simply the previous three years.

Subsequently, the securities alternate board of India (Sebi) got here out with session studies 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 form of ESG technique the fund is following, cheap assurance from a 3rd occasion as as to if the fund is following its acknowledged technique, adhering to disclosure on votes solid on firm resolutions, and is sustaining case research on portfolio corporations, 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 totally different methods if the proposals turn out to be legislation.

Also, fund managers can be required to elucidate the fund’s ESG technique on an annual foundation, how they interact with holding corporations, escalations raised by the fund supervisor to corporations, and particular feedback on the underlying corporations.

Sebi is attempting to nudge ESG score suppliers (ERPs) to think about the home context whereas score corporations. For this, they are going to want a novel set of metrics that may be measured within the Indian context.

Sebi can also be attempting to enhance the standard of knowledge coming from corporates. Among different issues, Sebi needs to uncover the ESG practices of an organization’s provide chain members and make audited disclosure for a set of ESG metrics necessary. This can be carried out in a phased method, beginning with the highest 1,000 corporations primarily based on market capitalization.

Till such time although, many fund managers will take into account 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 could be utilized to current funds and that there isn’t any must create a separate ESG fund.

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Updated: 29 Jun 2023, 09:00 AM IST

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