We see ESG integration becoming mandatory: Deepak Khurana of Refinitiv

In a Q&A, Deepak Khurana, Director, Sustainable Finance and Lipper, Asia-Pacific at Refinitiv, says India has ranked high on policy community involvement with 99 per cent transparency rating

Environmental, social and governance (ESG) investing is gaining traction in India and across the world. Deepak Khurana, Director, Sustainable Finance and Lipper, Asia-Pacific at Refinitiv, a financial data provider, discusses key emerging trends in this space with Samie Modak. Edited excerpts:

Which are the key trends that point to ESG-themed investing taking off in India and globally?

Assets dedicated to sustainable investment have grown at 11 per cent CAGR since 2014, and the growth is expected to be similar over next couple of years. The AUM of self-identified ESG funds is expected to contribute close to 36 per cent of global AUM by 2022. ESG is expected to become an essential part of investors long-term equity allocation. Participation from retail investors in the ESG space is hovering around 25 per cent and is expected to see a strong growth in coming years. India too is witnessing a noteworthy traction in this space. Firms like SBI Mutual Fund have integrated the ESG research into their core investment process. Quantum, SBI, Kotak, ICICI Prudential, and Axis Mutual Funds have taken a lead in rolling out ESG theme funds whereas DSP Mutual Fund, Aditya Birla Mutual Fund, and BNP Paribas Mutual Fund have already filed their offer documents with Sebi for approval of ESG theme funds.

What is the reason ESG investing is gaining currency?
 

There are various studies and research which have also established that the ESG factors are helping active asset managers to create alpha in their investment strategy. The other key factors enabling the ESG push include consumer demand, reputation risk and millennials preference to work for an ethical company. Governments across leading nations are emphasising to consider ESG risks, especially climate, as a fiduciary duty for institutional investors. The Paris Agreement and the EU’s leadership on ESG regulation is a typical example of such a drive and push. There has been a strong push from regulators globally for companies to disclose ESG details. In Asia, Hong Kong and Singapore are taking the lead in promoting ESG as part of their economic growth agenda. Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, has put ESG at the heart of its investment strategy and the Chinese regulator has made it mandatory for A-shares companies to disclose ESG-related information by 2020. In India, Sebi has asked the top 1,000 companies to disclose ESG details as per Business Responsible Reporting (BRR) framework.

Sebi has mandated top 1,000 companies to make ESG-related disclosures. How are the disclosure standards of these companies?

As per our study, India has ranked high on policy community involvement with transparency rating of 99 per cent, compared with 80 per cent for the wider universe. On equal voting rights policy India has scored 98 per cent, against 97 per cent for South Africa, 95 per cent for Brazil, and 98 per cent for China. 

What are the regulatory changes required to improve standards?

There is need to improve our disclosure framework (BRR) and push various stakeholders like asset managers, investment bankers, pensions, and corporates to integrate ESG measures in their workflows.

How do fund managers go about ESG investing? How do they obtain ESG-related information?

The ESG information is sourced through CSR reports, annual reports, company websites, stock exchange filings, NGO websites, and news sources. Fund Managers actively use market data platforms like ours, to get standardized and analytically presented information on ESG. Globally, a few approaches used for ESG investing include, the exclusion policy, where fund managers exclude investment sectors that are conflicting with their investment criteria, like during stock picking, they might avoid companies dealing in weapons, tobacco, or making investments in countries with poor human-rights records. Similar to the exclusion policy, is the norms-based exclusion approach, wherein fund managers through negative screening restrict their investments in companies who do not meet widely accepted norms, such as the United Nations (UN) Sustainable Development Goals, Carbon emission standards etc. Under Active Ownership approach, fund managers seek to influence companies during engagement and consulting by setting up regular meetings with top management, exchanging information and developing a trusted adviser relationship.

The last and most common approach used by fund managers is Best-in-class, where investors rank the potential investment options basis their ESG performance, and select best performers.

In the next 5-10 years, how will the ESG landscape change? What will be the macro benefits of these changes?

We expect the ESG integration to move from ‘nice to have’ in some markets and ‘mainstream’ in others, to ‘mandated’ by regulators. Future economic growth largely depends on how quickly and effectively we can respond to social and environmental challenges, especially those presented to our society by changing current systems, capital allocation processes and consumption behaviors. Policy makers shall increasingly recognize that the financial system can significantly influence the real economy in either direction – towards sustainability or undermining progress made against environmental and social goals.