ICICI Prudential ESG Fund Review: Should You Invest?

Published: September 20, 2020 at 11:42 am

ICICI Prudential ESG Fund is an open-ended equity scheme investing in companies identified based on the Environmental, Social and Governance (ESG) theme. This is a review of the ESG theme and whether investors should consider investing in such a theme and in this fund which has an NFO Period between 21st Sept – 5th Oct 2020.

What is Environmental, Social and Governance (ESG) investment theme? It involves choosing stocks of socially responsible, environment-friendly and ethical firms to achieve superior risk-adjusted returns. Examples of Environmental empathy (E) include efficient waste disposal, cognizant of climate change, pollution, energy and water conservation etc.

Social Responsibility (S) includes company management with gender equality, women empowerment, labour welfare & rights, contribution to social causes etc. Corporate Governance (G) refers to businesses with ethical practices, efficient management, absence of fraud illegal action etc.

In general, an ESG investor will not pick stocks involved in any (major) controversy, engaged in tobacco, alcohol, controversial weapons, gambling etc. The ICICI Prudential ESG Fund presentation refers to these as “sin companies”.

Besides the natural aesthetic appeal of investing in ethical businesses, the key idea behind the ESG theme is such companies are unlikely to be impacted by controversy, regulation associated with E, S or G factors making the business more sustainable. This conscience clearing stance is also expected to beat the market (eg. the Nifty) in the long run.

What is the investment strategy of ICICI Prudential ESG Fund? It will rate companies on the basis of E,S, G factors and provide a score from 0 to 10. At all times, 80% to 100% of the scheme portfolio will have stocks with a “high” ESG score and 20% can be non-ESG companies (just in case?).

What are the limitations of ESG investing? Unlike a quantitative strategy like low volatility or momentum, ESG scores are largely qualitative and much more subjective. According to the factsheet of Nifty 100 ESG Index, these are the top ten (out of 88!) stocks (Aug 31st 2020)

  • Reliance Industries Ltd. 10.62%
  • HDFC Bank Ltd. 9.70%
  • Infosys Ltd. 9.31%
  • Housing Development Finance Corporation 5.91%
  • Tata Consultancy Services Ltd. 5.01%
  • Hindustan Unilever Ltd. 4.47%
  • Axis Bank Ltd. 3.28%
  • Bharti Airtel Ltd. 2.92%
  • Larsen & Toubro Ltd. 2.86%
  • ICICI Bank Ltd. 2.49%

Are these the top “socially responsible, environmentally friendly and ethical firms” devoid of “major” controversies? Depends on who you ask! In a world where businesses are tightly interlinked it possible to identify an “ethical business”? Is it possible for any business to generate profits without destroying the environment?

Calling X or Y firm as a “sin company” is purely arbitrary. If producing alcohol is a sin then so is producing sugar which is just as much as a toxin to the liver as alcohol. What about firms that produce dairy or creating dairy-based products? The point is, ESG is an arbitrary, debatable notion that might appeal to those who wish to clear their conscience chasing stock returns.

An industry expert who wishes to be anonymous said, “ESG stock selection suffers from poor data quality, lack of standardization and regulations of reporting on data, subpar quantification of several qualitative variables, large scale data mining coupled with mis-selling based on people’s Greed (earn better returns) and Morality(while doing good deeds). Overall, this is yet another opportunity to rip off people with 2% fees. In short, ESG Investing is not a good idea and please stay away from them. There are several other less financially risky ways to help the planet “.

Performance of NIFTY100 ESG Index

The NSE has three ESG indices!! The Nifty 100 ESG index has stocks from the Nifty 100 with a non-zero ESG score and “controversy score of less than 4”! This will be the benchmark of ICICI Prudential ESG Fund. If the companies have a normalized ESG score of at least 50%, they will be part of the Nifty 100 Enhanced ESG index. As if this was not enough, there is a NIFTY100 ESG Sector Leaders Index which uses an “ESG risk score” to pick stocks from the Nifty 100.

The since inception movement of these indices are shown below.

Since inception growth of NIFTY100 ESG TRI index. This is the benchmark of ICICI Prudential ESG Fund. Along with this, NIFTY100 ENHANCED ESG TRI index and Nifty 50 TRI index are also shown.
Since inception growth of NIFTY100 ESG TRI index. This is the benchmark of ICICI Prudential ESG Fund. Along with this, NIFTY100 ENHANCED ESG TRI index and Nifty 50 TRI index are also shown.
Since inception growth of NIFTY100 ESG SECTOR LEADERS TRI index with NIFTY100 ESG TRI index with NIFTY100 ENHANCED ESG TRI index and Nifty 50 TRI index
Since inception growth of NIFTY100 ESG SECTOR LEADERS TRI index with NIFTY100 ESG TRI index with NIFTY100 ENHANCED ESG TRI index and Nifty 50 TRI index

There is not much difference in the movement of the three indices. Note that the sector leaders index has data only from Jan 2014 while the others from April 2011.  Notice that ESG index movement falls on Nifty when the market is range-bound (bet 2009 recovery and 2013 bull run).

The five-year rolling returns of NIFTY100 ESG Sector Leaders TRI index with NIFTY100 ESG TRI index with NIFTY100 enhanced ESG TRI index and Nifty 50 TRI index are shown below.

Five year rolling returns of NIFTY100 ESG SECTOR LEADERS TRI index with NIFTY100 ESG TRI index with NIFTY100 ENHANCED ESG TRI index and Nifty 50 TRI index
Five-year rolling returns of NIFTY100 ESG SECTOR LEADERS TRI index with NIFTY100 ESG TRI index with NIFTY100 ENHANCED ESG TRI index and Nifty 50 TRI index

When the market slump began in early 2018 the additional benefit of investing in ESG stocks quickly vanishes. This additional benefit, small to begin with, could further reduce due to fees since all ESG funds in India (from Quantum, SBI, Axis and now ICICI) are actively managed. Please note all ESG funds include the one from SBI are less than 2.5 years old at the time of writing. While BSE 500 returned 9.3% in the last year (trailing), the SBI ESG fund managed 5.7%. Are you ready to such a price for such conscientious investing?

No one can say for sure if the little outperformance that we do see in the ESG indices is only because of E, S and G factors and considering how supply vs demand for a stock pans out in markets daily, it is unlikely to be.

Should You Invest in ICICI Prudential ESG Fund?

There is not enough compelling evidence that the ESG theme is worth investing in- even from a pure moralistic point of view – and that too in an actively managed fund. The selection process even for the index is arbitrary and the history is too short to bet our money on. Therefore it is best that investors avoid ICICI Prudential ESG Fund or any other ESG fund for that matter.

Investors must recognise that the SEBI categorization rules allow a fund house to launch any number of thematic and index funds (unlike diversified funds or hybrid funds). Hence the plethora of ETFs and theme-based funds.

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