ESG investing is a strategy and practice to incorporate environmental, social and governance (ESG) factors in an investment decision. Chirag Mehta, CIO, Quantum Mutual Fund talks about why ESG is set to be the future of equity investing and how it has led to the rise of the responsible investing in India and the globe.
What is Responsible Investing?
Responsible or sustainable investing is pursued through incorporation of ESG factors in the investment process and is now popularly also known as ESG investing (environmental, social, and governance parameters).
Responsible investors are beginning to recognize the importance of weighing both financial and non-financial metrics while making investment decisions. They well understand that lack of foresight on risk and responsibility management eventually translates into lower profitability and valuation.
Responsible investing is calling attention to how corporations respond to climate change, water management, treatment of minority workers, and how its corporate culture builds trust and fosters innovation.
How sustainable is responsible or ESG investing?
Historical trends show that a business which has good ESG practices has potential to deliver good risk adjusted returns as they benefit from potential lower cost of capital and improved operational performance.
*Percentage of studies showing
Data Source: Oxford report ‘From stockholder to stakeholder’ based on more than 200 academic studies (March 2015)
When has ESG Investing taken off in India?
The COVID-19 Pandemic of 2020 has been a wake-up call for investors to prioritize a more sustainable approach – companies that adopted sustainability exhibited resilience during the ensuing economic downturn. The AUM of ESG Funds in India is currently at Rs. 11,956 crores as per AMFI as of Mar 31, 2022 and more and more AMCs are looking to adopt an ESG approach.
How is India geared to drive forward its sustainability initiatives?
The Budget 2022 seems to be pushing India into the right direction and has given a strong foundation for sustainable growth. Measures include:
- Government’s Green bond issuance: While the modalities of the Green Bond are yet to be finalized, in the long run, it is likely to bring a lot of traction and channelize sustainable capital in India.
- PLI (Production-Linked Incentives) Scheme: for solar module manufacturing will help reduce our reliance on imports
- Battery swapping could provide EV (Electric Vehicles) the big push with right policies and execution.
However, there are certain crucial factors missing in private sector inclusion:
- Incentives for companies to increase their share of renewable energy production
- CSR investments channelised towards sustainability initiatives,
- Incentives for technology and investments towards sustainability.
It is now the responsibility of corporate India and thoughtful investors to take the sustainability landscape to the next level.
With ESG Funds investing in Cement & Oil refining companies, are ESG Funds in India true to themselves?
ESG screening of companies does not mean excluding those in chemicals business or refining business or cement business etc, but it is just that they need to do it responsibly, utilise the technology available to be efficient and reduce emissions, effluent treatment, should not discharge untreated waste in soil, water or air, and should also take care of their minority shareholders and society; examples of good practices. The companies should be relatively better placed in many of these aspects, should have made progress and have a credible plan to be better going forward is what lends credibility in our assessment.
What approach does Quantum use for building the ESG portfolio?
Quantum India ESG Equity Fund is categorized as a thematic fund. Thematic funds, by definition, invest within a sector or across various sectors bound by the primary theme.
Quantum has a well-diversified equity investment portfolio that follows a structured and disciplined ESG investment process in portfolio selection.
The advantage of a diversified equity investment is that it allows investors to reduce dependency on a single basket of equities to generate risk adjusted returns.
While screening companies, we subjectively evaluate more than 200 parameters across the Environment, Social and Governance domains. What investors get is the result of a thorough & on-ground 360-degree view of the companies we invest in. Companies which score positive and are above the minimum threshold ESG score and pass our financial stability assessment are generally included in the portfolio. Our fund portfolio is purely based on ESG principles, irrespective of the PE ratio or any other factors. We look at the stocks ESG score to determine its weightage in our fund subject to investment and sector guardrails.
Low Score → Low Weight, High Score → High Weight.
At Quantum, we focus on taking a detective lens’ approach to ESG screening. Quantum is one of the first AMCs to introduce ESG as a fund in India. What’s unique about Quantum is that it banks on its own proprietary research, which has evolved through the years going through our own learning curve in the ESG space.
We can trace the evolution of our unique scoring system way back in 1996 at Quantum Group level, where we came up with what we called an “Integrity Screen”. And to date, the ‘G’ part of ESG – Governance sits at the heart of our evaluation of any company.
If a company/Board does not meet our integrity checks, it will not be included in the portfolio, irrespective of how large its weight is in the benchmark. So, while we always had some of the ‘Social’ aspects in-built in our research process (we avoided companies with questionable business practices), we started adopting a formal approach to ESG from 2015 in terms of an actual ESG framework and assessing the ESG score of companies.
How should investors allocate to ESG funds in their portfolio?
Investors can take advantage of the globally emerging investment opportunity to enable their portfolio to capture maximum benefits from the market cycles.
So far, the track record of the ESG index has been encouraging. We believe that in the long term, ESG funds has the potential to deliver good long-term risk-adjusted returns. But considering that ESG is a relatively new concept, it’s advisable that investors completely understand it before investing. Investors can start by allocating 15% of their equity portfolio to Quantum India ESG Equity funds. As investors get more comfortable with ESG investing, they could increase their exposure if desired.
#NIFTY100 ESG TRI, ##S&P BSE Sensex TRI.
Data as on Mar 31, 2022.
Past performance may or may not be sustained in the future.
Different Plans shall have a different expense structure. Returns are net of total expenses and are calculated on the basis of Compounded Annualized Growth Rate (CAGR). Mr. Chirag Mehta manages 4 Schemes and Ms. Sneha Joshi manages 1 scheme of the Quantum Mutual Fund. For performance of other funds managed by Chirag Mehta, please
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