New win-win-win equity strategy
SBI Funds Management
WF: What is ESG investing and why is SBI MF embracing this concept?
Navneet: As one of India’s leading AMCs, we strive to be a leader in responsible investment and stewardship. We are trustee of other people’s money and owe a fiduciary duty, first to our investors and then to the larger community we operate in, which can probably be best served not by trying to maximise short term profitability, but by ensuring the optimisation of long term return and risks.
ESG investing is an approach where apart from Financial considerations, we also look at Environmental footprint, Social impact and Governance factors while investing. We strongly believe that companies that focus on triple bottom line (People, Planet and Profits) deliver sustained returns over a long period.
We have also witnessed many accidents faced by the investor globally and in India during the past decade. For example, the value destruction in companies involved in mining, in many power companies post the cancellation of coal block allocation etc. convinced us that ESG factors are gaining importance.
India has one of the highest number of most polluted cities, environmental challenges are growing, awareness about inequality, climate change etc are growing. In this situation, we felt that ESG compliance is becoming mandatory for ensuring prosperity of any company and success of its investors. Hence, we decided to integrate the framework in our investment decision making process a few years ago. Its part of our belief system and is a long journey.
Look at it another way: equity fund returns are a function of the beta of the market and the alpha that the fund manager generates above the beta. A large portion of total return comes from beta. Beta in the long term is dependent on the economy, and long term sustainable growth of the economy comes only when businesses focus on sustainability, on environment, on good governance, on creating positive social impact. So in a way, when large fund houses start focusing increasingly on ESG, there is a message to companies about the need to adopt ESG in their business practices, which in turn creates long term win-win for all.
WF: How has ESG evolved globally and is there evidence that suggests that ESG based investing delivers alpha?
Navneet: Globally, large pension funds realised the need to do their bit towards sustainability and started putting pressure on fund managers to adopt ESG in their fund strategy. In India, we as large fund managers are taking up this mantle, without necessarily waiting for large investors to ask us to do so.
Focus on triple bottom line (planet, people and profits) makes very good sense from a long term sustainability point of view as well as from an investment strategy perspective. Forward looking managements who wish to build sustainable business models are increasingly focusing on ESG and this shows up in terms of superior performance of their companies. There is growing global evidence of ESG funds beating benchmarks, which is also contributing in no small measure to the rapid growth in AuM of ESG strategies. Even in India, the NIFTY 100 ESG index has outperformed NIFTY 100 index across time periods.
WF: How easy or difficult it is to implement ESG framework when managing public money?
Navneet: It has been quite challenging to implement the framework in India due to the lack of availability of data on performance of the companies on ESG parameters. However, with NVG SEE being made applicable to Top 100 companies by the stock exchanges a few years ago has ensured improvement in quality of data forthcoming from these companies. This universe is now being extended to Top 500 companies now which will make it easier to assess these companies on their ESG footprints. For the rest of the universe, accessing the ESG compliance data continues to be fairly challenging. The investors in India are yet to evolve to the level of awareness about ESG practices so as to pay for additional costs of generating this data and these costs of primary research would be very substantial. Hence, the asset managers are forced to use the secondary data available off the self on these parameters for their investible universe.
WF: What parameters will you consider when evaluating stocks on the ESG framework? What would be some sectors that would get excluded from your consideration set?
Navneet: SBI MF has a fairly comprehensive check list of over 50 parameters from across the Governance, Environmental & Social aspects of the company’s management of its affairs, with the emphasis being in that sequence. Its an exhaustive list but just to give a few examples, these may include energy and water consumption, emissions, use of renewable energy, long term impact of companies products and business on environment and society, relationship with workers, government and local community, composition and quality of Board of directors, related party transactions, executive remuneration, minority shareholder protection etc etc.
Our ‘ESG Framework’ helps us delve into a company’s management practices, culture and risk profile and helps us to question the management if the board’s decisions are harmful to the long-term shareholder.
In Magnum Equity ESG Fund, some businesses like tobacco and liquor and businesses that are highly polluting in nature in the chemicals space would be examples of sectors that will be excluded in the consideration set.
WF: What is the future of ESG investment in India?
Navneet: We see ESG compliance by the companies as their only way to ensure prosperity and perpetuity. Hence, we believe the long terms investors can ignore ESG footprints of their investee companies only at their peril. Globally, actually it’s the investors who are putting pressure on asset managers to follow ESG principles. In India, its other way round. Investors are not asking for it, we have taken a lead in creating awareness about the subject.
WF: In what ways are you playing a though leader role in creating awareness around ESG?
Navneet: We are the only Mutual Fund in India to voluntarily embrace CFA Institute’s Asset Manager Code of Conduct. We are a member of the IR (Integrated Reporting) Lab of CII (Confederation of Indian Industry). We are actively engaging with institutes which are at the forefront in the campaign to sensitize Indian Companies as well as Investors on the importance of ESG compliance for their long term success. Hence, we work very closely with these Institutions in their endeavours to promote ESG, which also helps us in continuously educating and updating ourselves on these issues. We launched ‘SBI Growth With Values Portfolio’ (focused on ESG and SRI principles), under our Portfolio Management Services in 2016. One of our flagship mutual fund scheme i.e. SBI Magnum Equity Fund has been re-positioned to SBI Magnum Equity ESG Fund (first ESG fund in Indian Mutual Fund Industry), following an ESG strategy.
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