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Want to impress investors? Having an ESG quotient helps

Environment, Social responsibility and Governance are the new benchmarks for fund managers focusing on sustainability practices. Companies across sectors, even those with large carbon footprints, are adapting processes to deliver the impact.

, ET Bureau|
Last Updated: Dec 21, 2019, 04.12 PM IST
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The risk of funds moving towards cleaner fuels from carbon-intensive fuels may affect the performance of Indian equities, as the weight of energy stocks is over 12% in the benchmark indices.
ET Intelligence Group: Sustainable and socially responsible investment is gradually moving into the mainstream, thanks to increasing awareness among companies. The rising clout of fund managers who focus on sustainable investment based on environment, social responsibility and governance (ESG) parameters have acted as a trigger for such investments.

A case in point is a fund manager at one of the largest ESG funds in India who included Hindustan Unilever in his portfolio after learning that it had started producing detergent bars that require less water while rinsing clothes, amid reports of a water crisis in Chennai. ESG-based investing is still in its infancy in India, with just two ESG funds having cumulative assets under management worth under $ 500 million, compared with the global ESG fund size of $30.7 trillion.

The performance of certain stocks show that investors, too, are conscious of their ESG responsibilities. For instance, Coal India has underperformed the benchmark index for the last five years despite growing coal volume and consistent dividend payments.

Consumption stocks are not an exception either. “The widening valuation gap between Hindustan Unilever (HUL) and ITC shows that the former is rewarded for efforts to reduce the carbon footprint,” said a domestic fund manager. After trading at similar valuations five years ago, HUL now commands a 40% premium over ITC.

“Investors interest in companies related to fossil fuels is bound to wane in the long term considering the risk to company valuations,” said Abhay Laijwala, an ESG fund manager at Avendus India.

The risk of funds moving towards cleaner fuels from carbon-intensive fuels may affect the performance of Indian equities, as the weight of energy stocks is over 12% in the benchmark indices.

Also, the company with the largest market capitalisation, Reliance Industries (RIL), has fossil fuel exposure. It has been consistently working on sustainability measures. It has a zero water discharge refinery and uses only desalinated sea water. RIL also has a facility to convert PET water bottles to polyester thread. In FY19, RIL recycled about 2 billion PET bottles.

Similarly, India's largest power producer NTPC has put up its first ultra-supercritical unit in Madhya Pradesh which will consume less coal, thereby lowering emissions.

Investors should, however, not shun fossil fuel and thermal power producers as they are a pivotal part of the existing ecosystem, said Chirag Mehta, the ESG fund manager of Quantum AMC. “The key thing to watch for these companies is their vision and delivery to reduce carbon footprint. If they show intent to cut it, there is no harm in holding them,” he said. Indian cement companies are more efficient than global peers. Shree Cement, for instance, uses only 72 litres of water to produce a tonne of cement, compared with the global average of 300 litres per tonne.

Companies including Mahindra & Mahindra, Havells India, Bharti Infratel, and Ashok Leyland have set up captive solar power projects to reduce carbon footprint. Given the rising awareness about sustainable growth, India Inc is well poised to meet the challenges of a cleaner environment.
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