In the past few years, non-financial factors such as climate change and governance issues have had significant impact on operation of various companies. As a result, assessing environmental, social and governance (ESG) factors of a company has acquired new significance to assess sustainability of companies.
In past few years, ESG has risen from being a fuzzy concept to a business, investing and political priority globally. Google searches on ESG has doubled worldwide and increased 7 times for India over the last 5 years. Moreover, growth of ESG dedicated funds by money managers in the US has risen from USD 4,803 billion in 2014 to USD 11,632 billion in 2018, a whopping 142% increase*.
Let us delve deeper to understand why ESG investment makes sense.
There is a possibility that companies generating high level of pollution may suffer from a future tax. Consumers may boycott companies that treat their employees unfairly. Further, the regulator may heavily fine firms with poor governance.
In Indian context, we have already witnessed multiple episodes that show how weakness in ESG practices can increase risk in businesses. In the recent past, environmental issues such as pollution led to restriction on diesel vehicles and construction activities in Delhi. Social issues such as protests against land acquisitions have halted a few infrastructure projects. Governance issues at banks prompted RBI to become more proactive in reviewing board appointments.
Therefore, investing in companies that adhere to the ESG framework can help avoid such uncertainties and adverse implications on the company business. In other words, companies following ESG norms are likely to have sustainable business which is likely to result in better valuation, lower tail risks and less systematic volatility.
Between 2011 and 2019, Nifty 100 ESG Index return has delivered CAGR of 14.5 % while Nifty 50 Index CAGR stood at 12.9%, shows a research done by Axis MF.
Moreover, Axis MF study shows that ESG theme could also curtail the downside risk. Data shows that while the Nifty 50 Index fell by 4% in 2015, the Nifty 100 ESG Index declined by 2%.
Data Source: Oxford report ‘From stockholder to stakeholder’ based on more than 200 academic studies (Mar, 2015), Bloomberg, NSE, Axis AMC analysis.
Past performance may or may not be sustained in future. Returns provided are CAGR for the period 31st Dec, 2011 to 31st Dec, 2019.
ESG investment in India
While the ESG concept has gained traction globally, it is at a nascent stage in India. Only a handful of fund houses are active in this space.
Soon Axis MF will launch Axis ESG Equity Fund. The NFO will open on January 22. The fund house aims to zero in on stocks based on fundamental bottom up approach while adjusting for ESG reviews of the company. The objective is to design a portfolio focused on sustainable long-term allocations with more than 5 years of investment horizon.
Moreover, the fund has provision to invest up to 30% allocation in global companies. This allows your clients to diversify their portfolio as the allocation in this ESG fund looks beyond domestic investing options.
* Google Trends (Data as on 20th Dec, 2019); US| SIF Foundation, https://www.ussif.org/
