The trend of sustainable investing by incorporating environmental, social and governance (ESG) factors is gaining traction in India. There are as many as 10 exclusive ESG-focu-sed funds (six were launched in FY21). Globally, the assets under management of funds incorporating ESG principles is more than $30 trillion. In that context, it is still early stages for India, but there is a clear line of sight for ESG-focused investing to accelerate, spurred by regulatory thrust and favourable demographics. From the standpoint of companies too, ESG adoption has moved from being a risk-mitigating tool to a core strategic priority.
India has an active regulatory and reporting framework for ESG. Implementation of the Kotak committee recommendations and Sebi-mandated ESG disclosure norms for the top 1,000 listed entities, disclosure and accountability norms have been significantly tightened. From a social perspective too, the government’s focus on digital transformation will act as a catalyst in creating equitable and inclusive business models.
Among global peers, India already ranks high in ensuring the protection of minority shareholders. While some sectors such as mining and utilities have a higher sensitivity to ESG factors, we see clear evidence of companies across the spectrum having taken firm action to address some of the ESG-related risks.
From an investment point of view, this has thrown open new opportunities; for example, renewable energy, which has been a focus area with a target capacity of 450GW by 2030. Recently, India’s largest cement company launched sustainability bonds (coupon rate linked to reduction in emissions). In fact, India has the second largest green bond market among emerging markets (EMs).
There is also early evidence to suggest that adherence to sustainability factors is a key source of alpha generation. The performance data over the past decade suggests that MSCI EM ESG Leaders Index and MSCI India ESG Leaders Index have outperformed their respective benchmarks by ~50% and 61% over this period. Globally, it has been amply demonstrated how the management’s execution capability is intrinsically linked to the corporate governance culture. Further, companies scoring high on ESG parameters will be less prone to any regulatory risks and social backlash as well.
ESG investing is not without its challenges. While evaluating the investment universe, managers have to deal with factors such as lack of standardized reporting and limitations of ESG data providers. Investors have to be wary of ‘greenwashing’, which is the practice of making the fund appear ESG compliant by misleading claims. However, with greater awareness, larger institutional participation and accreditation by professional associations, we should see standardization. A young demographic that is more aware of sustainability practices will help to accelerate the trend towards ESG investing. In fact, a holistic assessment of the business is required to understand the materiality of ESG factors. A deep emphasis should also be laid on how quickly companies can transform their operations in relation to ESG risks.
At White Oak, sustainability is ingrained in our investment process. We integrate ESG factors in the bottom-up fundamental research process and focus on ESG factors that are material from a risk and sustainability point of view. This approach is evident in our philosophy, process and valuation framework. We believe that strong governance is a prerequisite to cash-flow assessment and shareholder value creation, and pay special emphasis on corporate governance standards. White Oak, along with many India-based asset managers, are signatory to the United Nations-backed Principles for Responsible Investment Initiative.
Prateek Pant is chief business officer, White Oak Capital.
