ESG Is The Fastest Growing Investment Approach Globally: Chirag Mehta, Quantum AMC
In an interview with BW Businessworld, Chirag Mehta, Senior Fund Manager, Quantum AMC, talks about ESG fund holdings and its returns on investment
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What was the intent behind launching an ESG fund at this point of time? This is only the second fund of this find to be launched in India. Why do you think Fund Managers in India are averse to dabbling in ESG investing?
ESG investing is intuitively appealing. Therefore, I don’t think anyone would be averse to it. ESG investing is a new concept and requires specialised approach to evaluate companies on these non-financial parameters. ESG is a measure of sustainability of these companies and measure the impact of companies business on the environment and society and evaluates governance standards of these companies. Although ESG analyses non-financial factors, it is generally seen having material impact on a firm’s valuation.
We have done extensive research in the ESG space for the last 5 years. And we think ESG investing is here to stay because the growing relevance of non-financial environmental and social risks that can affect long term business performance. Climate change, privacy & data security, waste management, labour practices, gender diversity, board independence to name a few, will have a material impact on business operations going forward. ESG analysis aims to identify businesses which are well prepared to deal with these complex risks and thus create long term shareholder value.
ESG is the fastest growing investment approach globally with almost 25% of institutional investment now branded ESG. We believe that the scope for ESG investing and consequent alpha generation is even bigger in an emerging market like India.
How is the category “ESG” defined exactly? Is it safe to say that most ESG fund holdings will be blue chip companies? Is that not worrying, considering the rampant overvaluation present in that segment at this time?
ESG being a theme, the fund will be classified under Thematic funds category as per new classification rules. However, for all practical purposes, the Quantum India ESG Equity fund will endeavour to build a well-diversified portfolio across market cap but that have high liquidity and good ESG practices.
ESG Investing is buying sustainable businesses that are leaders in their industry when it comes to caring about their people, the planet, and their company's purpose and mission reflect that distinctly. There are not only the typical large cap blue chip companies; we have seen evidence of good ESG practices in many emerging businesses as well. With high governance standards, these companies tend to look beyond their traditional remit. They well understand that lack of foresight on risk and responsibility management eventually translates into lower profitability and valuation. There could be pockets of undervaluation in different sectors and hence we intend to have a well-diversified approach which will have representation from across the sectors, thereby reducing the risk of overvaluation persisting with leaders in a particular sector. The idea is to overweight sustainability along with diversification with an endeavor to deliver superior long term risk adjusted returns.
The only other ESG fund in the market right now (SBI Magnum) seems to have pretty much the standard top holdings that any other diversified equity fund would. Do you plan to be different?
While it’s difficult to talk on any other fund, our portfolio holdings will be based on our in-house proprietary research on ESG, which we believe is comprehensive and robust. We have been working on studying ESG practices and identifying sustainable businesses and have been through our learning curve and evolved a solid process of evaluating ESG aspects of companies. This depth of our research will be a standout point in reflecting the objective of the fund. We will be going beyond the publicly available disclosures and information through plant visits, stakeholder interactions, etc. to verify the authenticity and consistency of ESG compliance.
And yes, there could possibly be some overlap with other diversified funds as many of them look at these good quality companies. But there is scope for significant value addition from the other names that our portfolio will hold, mostly because these companies may not be popular yet but with proactive risk management and ESG compliance will be rewarded by the markets in the long term.
Does ESG investing deliver better returns? Can you share some back tested data or examples of ESG companies that were identified within your framework, that went on to become stellar performers on the bourses?
The India ESG equity indices have showcased superior long term performance as compared to their market cap weighted parent indices like the Nifty Index or the MSCI India Index. They have also been equal or less volatile than their parent indices. The drawdowns, a measure of downside risk, is usually seen to be lower than the usual stock market indices that investors track. If the historical track record of these ESG indices is any indicator of relevance, investors can consider these funds to have exposure to Quality and low volatility factors and generate higher risk adjusted returns, lower downside and tail risks and therefore sustainable profits.
Many academic studies have proved that good ESG companies generally have lower cost of capital, higher operational performance which generally gets translated to a higher share price performance. Even in the Indian context, we have seen companies that have followed excellent ESG practices which has led to markets giving them a higher multiple not only because of business economics but a reflection of awareness of material issues and a commitment to sustainability best practice.
Given that ESG funds are expected to have lower volatility, and therefore a lower degree of rupee cost averaging, would you say they are less suitable for long term SIP’s than more volatile funds?
SIP is an instrument which helps you avoid the risk of timing the markets and facilitate wealth creation in a disciplined manner by averaging cost of investments. ESG funds though expected to have lower volatility than other equity funds, will still provide opportunity for rupee cost averaging being an equity fund and be subject to stock markets and business cycles of the companies in the portfolio.