Amid corporate governance woes, fund managers push ESG schemes

Avendus, Quantum, SBI MF already wooing 'socially responsible' investors

Amid a spate of corporate governance issues coming to the fore in recent months and growing focus on climate change and sustainability, many fund managers are pushing schemes centred around the environment, social and governance (ESG) theme to investors.

Avendus and Quantum Advisors recently announced plans to launch ESG funds, and they aim to garner about $1 billion each over time. SBI MF had converted one of its schemes SBI Magnum Equity into an ESG fund in May last year. SBI Magnum Equity ESG Fund currently manages Rs 2,126 crore.

ESG investing contributes over $20 trillion, or a quarter of the assets managed worldwide. Though the market in India at a nascent stage, the potential is huge, believe experts. With 18 per cent of the world’s population, the country is one of the most important geographies for the achievement of the United Nations Sustainable Development Goals. India is also the third largest producer of greenhouse gases.

“The ESG factors will gain prominence with Indian investors over time, probably sooner than later. Just like in the US and Europe, the acceptance of these factors will necessarily have to be driven by large institutional investors such as the EPFO,” said Dhaval Kapadia, director-portfolio specialist at Morningstar India.

There is also a renewed focus in the current regulatory environment to address the need for improved ESG standards. For instance, the Securities and Exchange Board of India (Sebi) wants the top 500 listed companies to publish annual Business Responsibility Reports, and this number is expected to increase. Also, the Insolvency and Bankruptcy Code (IBC) was put in place in 2016 to protect the rights of creditors and improve the ease of doing business.

“Today, 26 per cent of total assets globally are managed under Sustainable Responsible Investing, and we expect this trend to be replicated in India as well,” said Abhay Laijawala, managing director and fund manager, Avendus Capital Public Markets Alternate Strategies. Laijawala added that ESG funds will be sought after not only by high net-worth individuals but also family offices and those seeking superior risk-adjusted returns.

Illustration by Ajay Mohanty

Global research shows that ESG strategies adopted by funds are yielding higher returns and higher valuations for both funds and portfolio companies. “The focus on ESG offers a new and much-needed mantra for sustainable investing and better risk weighted returns to investors. Aligning this with an active engagement style will help push the larger agenda of improving the quality of life of the communities served by companies we invest in, and a better environment for our common future,” says Mukund Rajan of Quantum Advisors. 

According to a recent research report by Kotak Institutional Equities, Indian stocks trade at large discounts to their fair values largely due to the market’s concerns over unsustainable high levels of debt, future of businesses in ‘low’ ESG industries facing potential disruption and weak corporate governance practices.