Engineering giant Larsen & Toubro may soon be out of the “exclusion list” for environmental, social and governance (ESG) investors. Companies, which adhere to noble or responsible norms, are termed as ESG and L&T was placed under the exclusion list, citing its involvement in manufacturing cluster munitions due to its Defence business.

According to global investment advisory firm CLSA, the company has been upgraded to ‘BB’ from ‘B’ on ESG score by global index major MSCI, which many global pension funds follow.

“L&T’s focus on cleantech was one reason behind MSCI’s recent upgrade of its ESG score from ‘B’ to ‘BB’, leading to a tier upgrade from ‘laggard’ to ‘average’, making it potentially investible. “4Q orders accelerate ESG focus with 22 per cent of inflows ($1 billion) coming from Solar EPC,” CLSA said.

Defence business

According to Morgan Stanley, L&T’s defence business has built a portfolio of indigenous, in-house products, systems and platforms, and solutions both on its own and by teaming-up with the DRDO (Defence Research & Development Organisation) and the Indian Navy. In FY20, defence accounted for 2.7 per cent and 4.4 per cent of L&T’s revenue and EBITDA. “Though contribution from defence has been modest, global ESG rating agencies and investors have put L&T in exclusion lists, citing its involvement in manufacturing cluster munitions,” said Morgan Stanley.

In its FY20 integrated report, L&T has clarified that “the defence business does not manufacture explosives or ammunition of any kind, including cluster munitions, anti-personnel land mines, or nuclear weapons. The business also does not customise any delivery system for such munitions.”

‘Responsible investments’

Responsible investments have been gaining traction from investors in the last few years.

It may be recalled that last year, the Swiss Association for Responsible Investments, SVVK, has excluded Tata Power, L&T, Bharat Dynamics and Walchandnagar Industries under the nuclear weapons category. SVVK was founded in December 2015 by seven major institutional investors, including Pension Fund of the Canton of Zurich, Public Pension Fund Publica, Pension Fund for the Postal Service and Pension Fund for the Federal Railways.

CLSA, which maintains its buy stance with a target price of ₹1,850, expects L&T’s consolidated revenue to grow 30 per cent on the low base (+2 per cent) of Q4FY20, led by a healthy 44 per cent y-o-y growth in infra segment. However, any one-off Covid provision at L&T Finance is a key to watch, it said.

Morgan Stanley said: “We believe L&T has strong ESG credentials, in both practices and disclosures, which is broadly under-appreciated by the market. As stakeholders gain confidence in disclosures about cluster munitions, L&T’s name could be cleared from exclusion lists, which could drive re-rating.” Morgan Stanley has set a price target of ₹1,721 with an ‘Overweight’ stance.

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