ABN Amro Asset Management's latest offering ABN Amro Sustainable Development Fund seeks to invest in 'socially responsible companies,' and is the first of its kind in India.

The fund house will arrive at short list in consultation with Crisil, which would apply a filtering and screening process. ABN Amro would then subject the shortlist to further analysis and narrow it down further. Back testing this model has yielded encouraging results, says the fund house.

What is the logic behind launching 'ABN Amro Sustainable Development Fund?'

David Morrow, Global SRI Product Specialist, ABN Amro Asset Management, says, "The consensus in the global investment community is that environmental, social and governance (ESG) factors are material to financial performance, and that investors should systematically assess these issues when making investment decisions. Our investment process is designed to ensure we invest in companies that are leaders on reporting on ESG issues."

Investment advisor Hemant Rustagi feels that since the fund intends to invest in companies across all ranges of market capitalization, it can find a place in every kind of portfolio. Moreover, since the fund would be investing only in socially responsible companies, the investment universe of the fund is well defined.

The assets under management are likely to be more consistent compared to a normal equity fund as socially screened funds generally retain investor loyalty, he adds.

ABN Amro Mutual Fund is optimistic about its novel product, but experts feel that there are several factors that investors should be aware of before investing in the scheme:

How reliable is the logic of ethical investing w.r.t. returns generation?

Investment expert Sandeep Shanbhag says, "There are two things to note here. 'Back testing' has become a catch phrase with NFOs. If investing successfully was as simple as basing actions on 'back testing' a particular model, every mutual fund not only in India but all over the world would have made hand over fist merely by 'back testing'. It simply doesn't work that way. Secondly, 'ethical investing' though having its place under the sun, as far as returns are concerned, has not worked. This is the experience of occidental markets where there are a number of mutual funds offering 'ethical portfolios'."

However, David Morrow counters it as he says, "We respect that some people discount the results of back tests; however one should not ignore the consensus of the investment community. Not only is the consensus clear, it is clear on a global basis, contrary to the opinion stated above that ethical investing has not functioned well in occidental markets. Companies that reduce their environmental impacts, have good relationships with stakeholders and society, and have governance policies that align the interests of management and shareholders are best poised for long-term success."

Can 'socially responsible companies' outperform others?

"There is no conclusive evidence to prove that socially responsible companies perform better than others," says Rustagi.

David Morrow clarifies, "Actually, the majority of academic studies have shown positive correlations between environmental, social, and corporate governance performance, and financial performance. In our view, this relationship will bear out more strongly in emerging markets, because we believe international investors will pay a premium to invest in responsible companies in emerging markets. Why? Because these companies are more likely better-managed companies that have lower risk and better long-term growth prospects as they focus on new business opportunities related to sustainable development."

Conclusion:

"Those investors who don't mind compromising on returns potentially that can be generated by investing in the broad market and would like to see their money encourage socially responsible companies may take exposure as this scheme is the first of its kind in the Indian market," says Shanbhag.

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