Contributed By : Navneet Munot, CFA , CIO, SBI Funds Management Pvt Ltd and Chairman, CFA Society India
- There is a need for large fund houses to take the lead on sustainable investing
- Long-term growth of the economy will happen when firms will focus on sustainability
Mutual funds are trustees of people’s money and owe a fiduciary duty—first to their investors and then to the community at large. It can be best served, not by trying to maximize short-term profitability, but by ensuring optimization of long-term return and risks.
As part of our fiduciary responsibility, value system and risk management strategy, it is our core belief that a business run in the best interests of all stakeholders seldom fails to create lasting value for its investors. Investing is an approach where apart from financial considerations, one looks at environmental footprint, social impact and governance factors of the investee companies. Companies focussing on triple bottom line (people, planet and profits) deliver sustained returns over a long period.
Environmental risks are bound to gain prominence in India. As per the World Health Organization (WHO), India inhabits 14 of the 20 most polluted cities of the world. It ranks among the top three nations to see the highest number of deaths from air pollution. The country is fast pacing towards becoming a water-stressed zone. As per a NITI Aayog study, 40 cities are likely to face drinking water shortage over the next decade. There are serious concerns about soil degradation in India and increased oceanic acidity world over. Rising inequality, with poor literacy and human development index in a democratic society, has the potential to creates risks for businesses as well.
Even as India is growing faster than most other economies, it is still a $2,000 per capita country and is yet to catch up meaningfully in the income ladder. In the process, the resource intensity of consumption is bound to rise. If history is any guide, ignoring the sustainability aspect can be damaging. China serves as a classic example. While high growth facilitated dramatic increase in consumption levels, it led to rapid degradation of the ecosystem, choking pollution and rising social tensions. Eventually, their policymakers had to shut thousands of manufacturing plants.
Some of the policy developments in India too, such as Delhi’s experiment with odd-even cars, move towards BS-VI compliance and now electric vehicles, plastic ban in Maharashtra, plant closures in Karnataka around Bellandur lake were in response to rising pollution. We witnessed social backlash, leading to a copper plant closure in Tamil Nadu, Supreme Court’s ban on liquor sales on highway and cancellation of coal blocks allocation (with adverse impact on mining and power companies). On the governance front, multiple instances of auditor resignations, excessive leverage, questionable “related party transactions” and accounting issues have recently come to the fore. Such issues may remain unattended for years. But once brought to the surface, it erodes the economic value of the businesses at one go. To sum up, investors can ignore ESG issues at their own peril.
Look at it another way: returns from equity funds are largely a function of the beta (market return) and the alpha that the fund manager generates above the market. Market return, in the long term, is dependent on the economy. Long-term sustainable growth of the economy comes only when businesses focus on sustainability. So, when large fund houses start focusing on ESG, it signals the companies to integrate sustainability in their business practices which, in turn, creates long-term win-win for all. Globally, large pension funds started putting pressure on fund managers to adopt ESG in their fund strategy.
Further, there is growing global evidence of better risk-adjusted performance of ESG strategies, which is also contributing to rapid growth in their assets under management. Even in India, the Nifty 100 ESG index has outperformed Nifty 100 index across time periods.
It has been challenging for us to implement the framework due to inadequate data availability. However, regulatory requirement of sustainability reporting now applicable to top 500 companies has helped. Over time, the policy nudge combined with better data and analytics will facilitate a more systematic approach towards it.
As part of the ESG framework, we look at around 50 parameters across the governance, environmental and social aspects, with the emphasis being in that sequence. These include energy and water consumption, carbon emissions, use of renewable energy, waste management, long-term impact of companies, products and business on environment and society, supply chain, relationship with workers, government and local community, among others. The relative importance of these parameters differs across sectors.
Advocacy is a critical part of responsible investing strategy and we work with several institutions to sensitize Indian companies as well as investors about the importance of ESG compliance for its long-term success. Over and above exercising voting rights, we actively engage with our investee companies on ESG-related matters.
The best preparation for tomorrow is doing your best today. Asset managers should pull up their values-based socks as the need to invest with an eye on environmental, social and governance issues will only get stronger.
(The article was originally published on Live Mint at – https://www.livemint.com/mutual-fund/mf-news/opinion-there-s-need-for-large-fund-houses-to-take-the-lead-on-sustainable-investing-1566225768279.html )