Sustainable investing has picked up pace in the past few years with billions of dollars flowing in. One of the key subsets of ESG is climate change, a major area of interest in current times.

Against this backdrop, HSBC Global Asset Management has launched HSBC Global Equity Climate Change Fund of Fund (HGECF), an open-ended fund of funds (FoF) that invests in a basket of overseas companies that provide solutions for the climate challenge.

While there are some ESG funds already on offer for investors to choose from, the new HSBC product ups the ante with a global diversification play. The NFO closes for subscription on March 17.

HGECF will invest predominantly in units of ‘HSBC Global Investment Funds - Global Equity Climate Change (HGECC)’, an over-13-year-old fund.

The environmental imperatives that the fund’s portfolio companies try to address are air pollution, deforestation, water contamination, waste management and broadly climate change.

Morningstar has classified HGECC in the large-cap blend category. The scheme currently has a growth bias.

The underlying fund, HGECC, currently has exposure to 40-50 companies across geographies — 37 per cent in North America, 46 per cent in Europe, 16 per cent in Asia and the balance 1 per cent in South America.

Around 25 per cent of its assets are invested in companies linked to renewable energy, 20 per cent to energy efficiency, and around 15 per cent to green building companies.

Top sectoral exposures comprise industrials (around 38 per cent) and technology (around 23 per cent). It also has investments in other sub-sectors such as sustainable water and waste management, climate change adaption, and clean transportation.

Top holdings include Prysmian, Infineon Technologies, Schneider Electric, Ecolab, Neste, EDP Renováveis and Azbil.

Performance

The MSCI World Climate Change Net Return Index has outperformed the broader MSCI All Country World Index (ACWI) over the past five years. The underlying HGECC fund has given INR CAGR returns of 17.3 per cent in the last five years vs 14.6 per cent of the benchmark ( ACWI). However, since its inception in 2007, HGECC has given CAGR returns of 8 per cent, underperforming ACWI’s 8.6 per cent.

In USD terms, the underlying fund has returned a CAGR of 3 per cent vs the benchmark’s 3.6 per cent over the past 13 years.

Hence, its outperformance in past five years may be indicative of ESG themes gaining prominence and thrust only in the recent years.

Its outperformance has been more significant since the onset of Covid-19. HGECC has returned 45.2 per cent in INR terms vs 19.5 per cent by ACWI. (41.2 vs 16.3 in USD terms).

ESG alternatives

Investors in India have the option of investing in the ESG theme through a clutch of thematic schemes including an exchange-traded fund (ETF). However, this is a new theme and there are just three offerings with at least a one-year track record (48-64 per cent return in one year versus the Nifty 50’s 58 per cent). We would like to see a longer performance trail to assess sustainability of returns of the category.

Also, it is important to time entry and exit in thematic funds as the themes go in and out of favour. Thematic schemes should form a part of your satellite allocation.

Note that international funds that invest in overseas equities do not qualify for equity taxation. But any mutual fund that invests more than 65 per cent of its corpus in domestic company shares is categorised as an equity-oriented fund for taxation purposes, which is an advantage for ESG funds investing in Indian stocks.

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