How responsible are your investments?

KS Badri Narayanan | Updated on September 04, 2020 Published on September 04, 2020

Growing focus on ESG by big funds may impact your returns too

Last week, two high-profile large fund houses said no to a few Indian companies as part of their ‘responsible investment’ policy.

Norges Bank Investment Management, Norway’s $1-trillion wealth fund, said it is excluding Page Industries from its portfolio for alleged human rights violations. Similarly, 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.

Huge followers

These institutions handle billions of dollars of investors’ money between them. The association aims to provide services to its members that enable them to act responsibly towards the environment, the economy and society through their investment decisions.

While SVVK identifies four broad categories — anti-personnel mines, cluster munition, nuclear and conduct-based companies — Norges Bank shuns companies that have presence in production of coal or coal-based energy, manufacturing of tobacco products, causing severe environmental damage, nuclear weapons, unacceptable greenhouse gas emissions, serious violations of fundamental ethical norms and gross corruption.

In simple terms, companies which adhere to noble or responsible norms are termed as environmentally, socially and governance (ESG)-responsible companies.

In India, this theme is gaining traction not only among corporates but also among investors. Now, most companies prefer to score high on ESG credit ranking to attract both investments andgood brand name.

Recently, the National Stock Exchange along with Stakeholders Empowerment Services (SES), a proxy advisory firm, came out with a study on ESG and its impact on 50 companies. According to the findings of the study, companies have largely scored better on policy disclosures followed by the governance factor, compared with environment and social factors. The overall ESG score for these companies stood at 71 per cent.

The environment factors considered include air emission, energy consumption, water consumption, waste generation and effluents, while women empowerment, fatalities, child labour, sexual harassment and cyber security were considered for the social scorecard. For governance, independent directors, executive directors, chairperson, women directors, age of directors, board attendance, committees, remuneration, statutory auditors, pledge, shareholder resolutions, whistle blower complaints, ethics, bribery and corruption were considered.

Better returns?

According to the NSE-SES report, the MSCI All Country World Index (ACWI) ESG Leaders Index rose 52 per cent in the past five years, against 39 per cent for the MSCI ACWI. Even in India, ESG index companies, on average, have performed better compared to other index companies.

The Nifty 100 ESG (TRI) and Nifty 100 Enhanced ESG (TRI) have delivered annual returns of 11.3 per cent and 11.5 per cent since April 1, 2011 (till December 2019), which is 70 bps and 90 bps higher than the returns of Nifty 100, that gave an annual return of 10.6 per cent.

However, according to Morningstar, a global mutual fund tracker, introducing the ESG criteria into an investing framework is an active decision. “Like any active decision, the only guarantee is that ESG investors’ performance will be different compared to the market. It might be better; it might be worse.”

Morningstar’s own research shows that (after controlling other factors), it is a push. “Historically, there has neither been a material payout nor penalty for investors in global stocks that earn top ESG marks,” it added.

To be sure, there remain many vocal supporters of the concept of shareholder-value but ESG investing has already become mainstream in some countries, scoring major successes, the fund said citing the examples of the world’s largest asset manager, BlackRock, and the biggest pension fund in the US, CalPERS.

Going forward, in India too the concept will gain currency in quick speed. Already some AMCs — SBI, Quantum, Axis and ICICI Prudential — have launched ESG funds.

So, common investors too need to adjust their investment style, and earn a little more.

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Published on September 04, 2020
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