The ESG Mutual Fund Negligence & Risk of Investors: With Case Study From The SBI Magnum ESG Fund & The CRISIL ESG Rating

 

                                                                         

                                                        *BIRENDRA K JHA 

You might have come through eye catching advertisements "SBI Magnum Equity ESG Fund best plan,  invest Rs One Lac and get return of Rs 70 Lacs". The social media is filled with such investor provoking advertisements. This is demonstrated here that how the Mutual Fund, operators in India have done negligence in investment funding.  This is demonstrated here,  how  wide scale trust and protection of the interest  of the investors, who look for ESG Compliance, have been compromised. No doubt, the ESG Mutual Fund are promoting greenwash until or unless "consistent, comparable,  and  decision-useful  scheme" as mandated by the SEBI Guideline in protecting the investors are consistently taken by the stakeholders through a third party social audit.   

The SEBI has jumped one step further in introducing the concept of the Green Funding Investment. After the SEBI has given nod for green investment, funds like SBI Magnum Equity ESG Fund; Quantum India ESG Equity Fund; Aditya Birla Sun Life ESG Fund; ICICI Prudential ESG Fund; Axis ESG Equity Fund; Kotak ESG Opportunities Fund; Quant ESG Equity Fund; Invesco India ESG Equity Fund; Mirae Asset Nifty 100 ESG are in the market. 

This shall be demonstrated here that till date the Green Funding Investment has not been clearly understood while handling the Mutual Fund by the Asset Management Company and its Fund Managers. How ESG based mutual funds are generating and promoting greenwashing, in absence of implementing the "decision-useful scheme" as now mandated by the SEBI, shall be demonstrated here with taking only two ends. One the "SBI Magnum Equity ESG Fund" which is the AMC Company and its investment pattern in the Axis Bank.  

I have demonstrated earlier that the agency like CRISIL captures maximum data provided by the company itself for the ESG Rating. In this condition, the data supplied for the BRSR compliance or the ESG compliance are not trustworthy. Relying heavily such mechanism, is the violation of the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, where there is guarantee to protect the interest of the investors in securities market and to  promote  the  development  of,  and  to regulate the securities market.

In my earlier paper I have demonstrated how in 2022 the CRISIL has rated defectively the Axis Bank's ESG Rating at the extreme scale of the  “Leadership Category". This CRISIL rating was poor, defective and relied heavily on the disclosures and documents supplied by the Axis Bank. The CRISIL failed to ask the Axis Bank to load third party social audit on the ESG Compliance on the website, when it has recorded poor ESG compliance in the past with mass corruption practices and social compliance deviation. For detail understanding on the Axis Bank's CRISIL rating look the following link: 

CRISIL POOR RATING EXPERIENCE AXIS BANK

This has been demonstrated very clearly that the Axis Bank has broken the ESG pillars. The CRISIL failed to capture the correct rating of the Axis Bank. The Axis Bank has also not supplied so far, any third party social audit report, to believe that the past greenwashing practices are discontinued. However, whatever matter was reported in the Annual Report by the Axis Bank that was taken into consideration  by the CRISIL like ESG rating agencies.  Such poor ESG rating allowed SBI Magnum Equity ESG Fund to invest in the Axis Bank at a tune of 3.03% of total investment strength. The SBI Magnum Equity ESG Fund currently holds Assets under Management worth of Rs 4879.42 crore as on Oct 31, 2023. In Axis Bank some Rs 148 crore has been invested    by the SBI Magnum Equity ESG Fund.  This is major failure of the SBI Magnum Equity ESG Fund and its Fund Managers in understanding the thin line difference of ESG Compliance and implementing the "decision-useful scheme" as now mandated by the SEBI.  

Clearly the Axis Bank is promoting greenwashing. After the collapse of the 2022 CRISIL's ESG rating, there is no any reason that any ESG based mutual fund should be invested here without third party social audit. Given the greenwashing features of the Axis Bank, the Fund Manager of the SBI Mutual Fund has not taken care in conducting the third-party social audit of the Axis Bank, before any heavy investment of mutual funds in the Axis Bank. This is entirely the violation of the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, where the Fund Manager is expected to protect the interest of the investors in  securities  market.

In following data, this is shown clearly that how the Fund Manager of the SBI Magnum Equity has invested in the Axis Bank at 3.03% of the strength of the total investment.        

 

The SBI Magnum has invested 3.03% in Axis Bank, which is somewhat Rs. 148 Crore investment alone in Axis Bank. 

Greenwashing & Extreme Care: 

The Regulation 77 of SEBI (Mutual Funds) Regulations, 1996 has changed the scenario of green investment in India. Now SEBI has permitted launch of multiple ESG schemes with different strategies by Mutual Funds. But, the SEBI mandates for "consistent, comparable, and decision-useful scheme" to enable investors to make informed investment decision and to prevent greenwashing. The "decision-useful scheme" mandated in the SEBI is that before mutual fund investment, the fund manager should conduct reliable exercises like conducting third party social audit on the ESG Compliance or ask the companies who are desirous of mutual fund investment to load third party social audit of ESG on the web site.   

The SEBI Master Circular on Mutual Funds No.  SEBI/HO/IMD/IMD-PoD-1/P/CIR/2023/74 dated May 19, 2023 introduces important measures to facilitate green financing with  thrust  on enhanced  disclosures and  mitigation  of green washing risk. Now mutual fund under the   ESG   category   shall   be launched with one   of   the   following strategies:

a.Exclusion

b.Integration 

c.Best-in-class & Positive Screening 

d.Impact investing 

e.Sustainable objectives

f.Transition or transition related investment

Minimum 80% of the total "Assets Under Management"(AUM) of ESG schemes  shall  be  invested in  equity  &  equity  related  instruments  of that particular strategy of the scheme where there is assured compliance of no green washing risk.  

The fund managers of ESG Funds should  not invest in companies that deal in products and services that are socially and environmentally harmful like tobacco, liquor, and gambling, poor ESG practices or promoting greenwashing. 

Now ‘Fund Manager Commentary’ along with the additional disclosures with respect to engagements undertaken by Mutual Funds for ESG schemes, as required to be disclosed in  terms  of  the SEBI  letter  dated February 08, 2022, shall be provided in the Annual Report of the ESG schemes. This commentary should must now be based on the mandatory audit by the Social Auditor, who conducts  Independent Assurance on the ESG.  As per the SEBI Law, the AMCs shall obtain from a Social Auditor, an independent qualified Assurance Audit on an annual   basis   regarding the ESG scheme’s portfolio, whether are in compliance or not ? The Social Auditor also looks in this Independent Assurance, whether  the strategy and objective of the scheme, as stated in the Scheme Information Documents are fulfilled or not.   

This is duty of the Social Auditor to check the investment portfolio. Whether funding investment is into  greenwash portfolio or not?  The Axis Bank's case mentioned above, is a good example of greenwash, where investment  has been promoted by the SBI Magnum. 

The board of directors of the AMCs, based on comprehensive internal ESG audit, shall certify the compliance of the ESG schemes with the regulatory requirements including disclosures, in annual report of the scheme. This is mandatory and good practice to curb greenwash promotion by the mutual fund operators. But, the path is not so easy. It needs good and intelligent Social Auditor, who can break the ice at right time.  

 ( Birendra K Jha,  is a Pan India Practitioner on the "Social Impact Assessment Audit" & "ESG Audit".  He is a Qualified & Certified  Social Auditor from the ISAI (ICAI). He is Director of HR Lab, a Social  Audit firm. Apart from Social Audit, he provides consultation on the CSR Audit, ESG Audit, CSR funds; CSR Programs; CSR Need Assessment; CSR Program Measurement; Entry & Registration- Social Stock Exchange & provides Capacity Development Training to industries on the CSR & ESG. He is based at Delhi-NCR. He overlooked at senior position as General Manager and Deputy General Manager in the previous South Korean MNC Company in India handling human resource and social audit of ESG practices for more than a decade. He may be approached at: birendrajha03@yahoo.com )