Ethical indices outdo benchmarks

Even as socially responsible investing (SRI) is yet to find its feet in India, indices that screen stocks based on ethical and environmental concerns have been outperforming their benchmark peers.

Socially responsible investing describes an investment strategy which seeks to maximise both financial return and social good. In general, socially responsible investors favour corporate practices that promote environmental stewardship, consumer protection, human rights and diversity.

For example, while the Nifty has delivered 73 per cent returns since March 9 when markets started showing an uptrend, the S&P ESG (environmental, social and corporate governance practices) India index has returned 105 per cent. Similarly, the CNX Nifty Shariah and the CNX 500 Shariah have posted returns of 76 per cent and 81 per cent, respectively.
 

NUMBER GAME
Indices	Returns since 9-Mar (In %)
Nifty	73.00
S&P ESG India	105.00
CNX Nifty Shariah	76.00
CNX 500 Shariah	81.00
Fortis Sustainable Development Fund	40.90

Some of the stocks in the S&P ESG index include Infosys, Punjab National Bank, Bharti Airtel and Titan Industries. Only those stocks with a minimum traded value of Rs 2,000 crore in the last twelve months form a part of the index. This ensures liquidity in the index.

Socially responsible investing is quite popular in developed markets, though yet to catch up in India. One of the main reasons being lack of awareness on these investments. Secondly, investors in the country are too focussed on returns, so they ignore other factors which might be important from a long-term view.

“One fact that has come to the fore is that there is certainly some co-relation between good governance and financial performance. The companies in this index score high on parameters of governance. Episodes, such as the Satyam fiasco, have heightened investors’ concern on governance issues. There is a willingness among global majors to look at these investments. SRI is still in a nascent stage in India and one needs greater sensitisation of investors to make it popular,” said Subir Gokarn, chief economist, S&P Asia-Pacific.

Globally, the UN has PRI (principles for responsible investing) initiative which has major global pension funds and endowments as signatories, who are committed to responsible investing, based on proper consideration of environment, social and governance (ESG) issues. The PRI initiative has now over $18 trillion assets.

The only such fund in India is Fortis’ Sustainable Development Fund, which has posted 40.9 per cent returns since March 9. Assets under this fund have mostly remained stagnant because of less appetite for such investments in India.

Shariah funds too have done well even in this market, showing that ethical investments can fetch returns. Says Zafar Sareshwala, managing director, Parsoli Corporation, “Shariah screens companies based on debt-to-market cap and strong asset base. We believe companies with low debt and receivables tend to do well in long term.”