Wizards of Finance, (a joint initiative by CNBC-TV18 and Mirae Asset Mutual Fund) is an up-close and personal investor education series that delves into insights on long-term disciplinary investments during market volatility.
ESG Overview in Indian Markets
India is currently at a nascent stage in the Environmental, Social, and Corporate Governance (ESG) zone. However, it is increasingly gaining traction amongst the investing community these days.
In the last 2-3 years, India has experienced multiple issues on corporate governance matters like labour unrest and plant closures. These issues have highlighted the importance of environmental and social issues, along with the need for disciplined governance.
Kaustubh Belapurkar, Director - Manager Research, Morningstar Investment Advisers India, said, "Sustainable growth has become a very important thing because if you do not sustainably manage the stakeholders, be it the environmental factors or the social factors... Your growth can be hit really bad."
Motivation Driving ESG Fund Investments
In India, ESG Investment was initiated as a risk-management exercise. To avoid huge stock events, institutional investors sought this asylum to evade losses and bad image.
With time, as the ESG Fund gained popularity in Europe and the US, empirical evidence began to corroborate its promising potential. A study published by Morningstar revealed 35% of sustainable investment funds in Europe were in the top quartile.
With Indian organisations understanding the principles of sustainable growth, we witness significant improvements in corporate operations. To avoid risks, good behaviour on ESG factors are building robust systems, which aim to generate higher profits and investing alpha.
Trends Noticed in the Indian ESG Markets
As companies are modifying risk exposure exercises, ESG is gaining the spotlight it deserves.
Lovaii Navlakhi, Founder and CEO, International Money Matters, states that investing intermediaries are experiencing rising queries and promising investor sentiments towards the Indian ESG funds. He says, "Some of our clients are now starting to ask for this... And it's now our job as intermediaries to make sure that we educate investors."
The focus is shifting from risk management to creating better returns to the risk profile by investing from a long-term perspective.
The Varying Levels of Importance Levied Onto E, S, and G
With regards to organisational ESG research, Siddharth Srivastava, Head of ETF Products at Mirae Asset Investment Managers (India) Private Limited, says, "You first see which factors are more pertinent to which industry. For example, in the energy sector, carbon emissions, wastage, managing resources, health and safety hazards... Will be more pertinent."
Therefore, environmental factors weigh in greater than social and corporate governance. While there is no set rule in regard, it entirely depends on the specific industry standards and operational efficiency.
Do ESG Fund Managers Avoid Chemical Companies on Account of the Environmental Activities?
ESG Fund Managers usually pick the top-performing companies across many industries. Inherently high-risk sectors like energy and fertilizers and pesticides will always float in the market.
Picking the low-risk ESG industries skews your portfolio mainly towards IT companies. The exposure will be similar to the benchmarks but will record poor ESG performance.
To avoid this scenario, managers opt for high-performing chemical companies who perform well on the ESG tipping scale.
Which Factors Influence the ESG Investing Process?
India has just begun in ESG investments. Therefore, there aren't many varieties available to choose from. At this time, it's best to start slow, get acquainted with products, and understand market movements.
In the international space, one can explore the ETF route which may result in fruitful ESG investments. Lovaii believes up to 10% of the total capital is a good portion to invest in ESG funds, provided that there are enough options to choose from and they suit investor requirements.
The Risk to Return Ratio in ESG Funds
When companies focus on non-financial parameters, their performance speaks volumes. Good corporate imagery may boost market sentiments and long-term returns.
This comes at a cost.
An investor needs to be vigilant with his portfolio. If not constructed well, the concentration in certain sectors bears no fruits than their potential. Plus, it's important to be aware of Green Washing, where companies claim to be ESG compliant when, in reality, they aren't.
How Does the Future Pan out for ESG Funds in India?
Kaustubh believes that in the future, ESG will become "pretty much the gold standard when you're looking to evaluate companies." In time, investors and organisations will look at ESG as a hygiene factor rather than question its importance.
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First Published: IST