ESG INVESTING IS FAST GAINING TRACTION IN INDIA

Wednesday 9th June, 2021

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39 POWE ~ POINT Respond to this cojumn at mintmoney@livemint.com ESG INVESTING IS FAST GAINING TRACTION IN INDIA Sustainable growth There is early evidence to suggest that adherence to sustainability factors is a key source of alpha generation. 250 Gross returns 78 MSCI India ESG Leaders Index MSCI India Index 200 ) 157 150 o 100 O 50 Tapron Marzonl Base value taken as 100 Source: Bloomberg PARAS JAIN/MINT hetrend of sustainable investing by incorporating environT mental, social and governance (ESG) factors isgaining traction in India. There are as many as 10 exclusive ESG-focused funds (six were launched in FY 21). 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 isa 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 arisk-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 forthe top LOOO listed entities, disclosure and accountability norms have been significantly tightened. From a social perspectivetoo, the government's focus on digital transformation will act asa catalyst in creating equitable and inclusive business models. Among global peers, India already ranks high in ensuring the protection of minority shareholders. Whilesome 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. Froman investment point of view, this has thrown open new opportunities; for example, renewable energy, which has been afocusareawith atarget capacity of 450GW by 2030. Recently, India's largest cement company launched sustainability bonds (coupon ratelinked to reduction in emissions). In fact, India has thesecond largest green bond market India has the among emerging markets (EMSs). second largest There is also early evidence to sugbond gest that adherence to sustainability green factorsis a key source ofalpha generay phag market among tion. The performance data over the emerging past decade suggests that MSCI EM markets 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 tothe 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 withoutits challenges. While evaluating the investment universe, managers have todeal with factorssuch aslack of standardized reporting and limitations of ESG data providers. Investors have to be wary of 'greenwashing', whichis 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 demographicthat is more aware of sustainability practices will helpto accelerate the trend towards ESG investing. In fact, a holistic assessment of the businessisrequired to understand the materiality of ESG factors. A deep emphasisshould 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 factorsin the bottom-up fundamental research process and focus on ESG factors that are material from arisk and sustainability point of view. This approach is evident in our philosophy, process and valuation framework. We believe that strong governance isa prerequisite to cash-flow assessment and shareholder value creation, and pay special emphasis on COrporate governance standards. White Oak, along with many Indiabased asset managers, are signatory to the United Nationsbacked Principles for Responsible Investment Initiative. Prateek Pant is chief business officer, White Oak Capital.