How Quantum Mutual is tackling ESG investing

Aarati Krishnan | | Updated on: Jun 20, 2019
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ESG, not a choice but a necessity, says chief Chirag Mehta

ESG investing or investing in companies that meet high environmental, social and governance standards is quite the rage globally. With many marquee investors switching to it, over $22 trillion in global institutional money is believed to be invested in ESG-compliant companies.

In India, very few money managers have attempted to dabble in ESG investing, given the scepticism about whether such strategies generate competitive returns and whether there is a large enough universe of ESG-compliant companies.

Quantum Mutual Fund’s Chirag Mehta who will be managing the just-launched Quantum India ESG Equity Fund, clarified these issues in a recent meeting with BusinessLine .

Asked if the Indian market is evolved enough for ESG investing, Mehta explained that ESG investing was increasingly not a choice but a necessity for Indian investors. “Recently, we’ve seen many instances of regulatory or judicial interventions in sectors owing to environmental activism. For instance, the courts have tried to improve air quality in New Delhi by curbing the use of diesel vehicles.

“Policymakers have set ambitious targets for generating renewable energy to substitute dirty fuels like coal. There’s a debate around nudging Indian vehicle makers to move to less polluting electric vehicles. In all these cases, environmental issues already have a bearing on the companies’ prospects and stock price performance.

“We believe the trend will only accelerate in future, as India is quite vulnerable to climate and geopolitical risks. The social media is also creating a lot of consumer awareness about companies’ concern for the environment and society which will force Indian companies to be more ESG-aware.”

At a critical juncture

While environmental factors are triggering policy push back for some companies, whistle-blower complaints and auditor resignations have caused stock prices to collapse in others, underlining that governance risks are quite critical to evaluate in investing too.

So where will Quantum get the information to screen companies for ESG parameters? Mehta says that Quantum’s investment team has been working on its ESG screening process for the last 4-5 years and has devised an in-house scoring system to rank listed companies on ESG.

“We collect primary information through plant visits and meet with the managements and sustainability teams of companies. We cross-verify with suppliers, distributors and consumers. We also access business responsibility peports and annual report disclosures, apart from sustainability reports, pollution control board and news reports. But yes, one problem we face is that while ESG compliant companies are willing to share a lot of information, information is hard to access on companies who don’t score high on the parameters,” Mehta said.

First-mover advantage

Is the investment universe large enough? Mehta believes it is. Of the 450-500 listed companies that meet Quantum’s liquidity parameters, over a 100 have been screened and about 40-50 have been identified. Given that ESG investing is at the nascent stages in India and that not many companies meet these parameters, Quantum believes there’s an advantage to being a first-mover in owning these stocks.

Does ESG investing deliver better investor returns? Mehta cites companies such as Marico Industries and Berger Paints which have delivered better stock returns than their sector rivals while adhering to high ESG standards.

Quantum AMC’s presentation claims that the Nifty 100 ESG Index had delivered a 13.4 per cent CAGR between inception (April 2011) and June 2019, outperforming the Nifty50’s 10.8 per cent CAGR in the same period. It has also suffered lower draw-downs in bear markets.

Published on June 20, 2019

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