Amid the spate of corporate governance issues cropping up with rising frequency, Indian markets will see two entities launch the earliest funds based on Environment, Social and Governance (ESG) investing.
Three former Tata group executives have come together with asset manager Quantum Advisors to launch a $1-billion ESG fund to invest $30-50 million in small to mid-cap companies in India for an 8-9% stake.
Meanwhile, the alternate asset management arm of Avendus Capital is launching India’s first ESG-based fund. It has tied up with Institutional Investor Advisory Services (IIAS) for putting in place a ranking framework covering ESG principles.
Last April, Kotak Mutual fund became the first asset management company in India to sign the UN-supported Principles for Responsible Investment (PRI) – a global network of investors that attempts to integrate ESG practices into investment practices.
Four more investment management firms from India are signatories to PRI. In May, SBI Magnum Equity Fund changed to become SBI Magnum Equity ESG Fund, a thematic fund investing in companies that follow the ESG norms.
So, what has prompted these institutional investors to turn to ESG investing now? Globally, ESG investing has gained ground.
“26% of total assets globally are today managed under socially-responsible investment – $22.9 trillion vs $13.6 trillion in 2012,” said Abhay Laijawala, managing director of Avendus Capital Public Markets Alternate Strategies.
Globally, green bonds (to fund energy efficient projects), blue bonds (to fund marine protection), environmental impact bonds and ESG-themed ETFs have been launched over the past one decade.
According to a recent report by Bloomberg Intelligence, ESG and sustainability-focused ETFs should continue to grow based on niche themes such as low-carbon, climate and gender. While developed market ESG indices outperformed in 2018, the MSCI Emerging market ESG leaders trailed but still outperformed on a long-term basis. These indices need to keep up their outperformance to keep the investments coming, the report said.
Besides, there is strong research evidence of ESG investing delivering superior returns since companies with strong sustainability scores demonstrate better operational performance and are less risky.
For instance, the 35-member MSCI India ESG Leaders Index, providing exposure to companies with high ESG performance relative to their sector peers, has outperformed the 78-member MSCI Index over a longterm period from September 2007 to January 2019.
HDFC, Infosys, TCS, Axis Bank, HUL, ICICI BankNSE -1.42 %, HCL Tech, M&M, Bharti Airtel and Wipro are the top ten constituents of the ESG index.
“In the Indian context, governance takes priority over social and environmental aspects since minority shareholders stand to lose in the absence of governance,” said Nilesh Shah, MD of Kotak Mutual Fund. “It is also important for investors to focus on companies that are adopting socially and environmental sustainable practices”.
“As fund houses, it is in our interest to adopt ESG investing – thereby attempting to create a positive ecosystem of ESG-compliant businesses,” he added. “Pressure from investors will prompt companies to change and become more ESG compliant before regulations kick in to make ESG compliance compulsory.”
Regulations are also providing the tailwinds for ESG-driven investing. Thanks to business responsibility reporting and Sebi listing regulations, companies are disclosing more data than ever before – reporting their compliance to environmental, social and governance norms.
According to Amit Tandon, MD of IIAS, there is greater awareness about ESG compliance now. Investors have started pushing for it. However, not all are optimistic about ESG investing picking up in the near term.
“It will take around 10 years before ESG – as a combined concept – gains popularity among the investors,” said G. Chokkalingam of Equinomics Research. “ESG concerns grab attention only when they have monetary implications and impact the bottomline, otherwise not many monitor them.”
“Analysts as well as media still look out for quarterly guidance and that’s what occupies the mind of the investors on the Street. Renewable energy, for instance, is environment-friendly but still solar companies are making losses and are trading at cheap valuations,” he added.
Source Economic Times