We, at SBI Funds Management, firmly believe that businesses operating on the best ESG principles would yield better financial performance and deliver superior returns to investors in the long term. On the other hand, there have been several examples of businesses suffering huge losses or even being wiped out as a result of neglect of these issues.
While integration of Environmental, Social and Governance (ESG) factors in invest decision-making is catching up with Indian Asset Managers (AMCs), a large part of Indian individual investors, appear to be still woefully insensitive to the long term impact of ESG practices on the fortunes of businesses as most of their past returns could have primarily come from asset allocation - that is by simply being invested in equities. The growing awareness about importance of ESG issues among businesses appears to be rather driven top down in India by the Government agencies and regulators.
NVGs A Major Step Towards ESG Investment
The first major step in promotion of ESG was the launch of National Voluntary Guidelines on Social, Environmental and Economic responsibilities of Business (NVG) by the Ministry of Corporate Affairs (MCA) in July 2011. Securities and Exchange Boards of India (SEBI) followed up in 2012 by making publication of annual Business Responsibility Report mandatory for the top 100 companies by Market Capitalisation. The same is now being mandated for the top 500 companies. The new Companies Act 2013 also has strong focus on improving corporate governance which provided a further boost to sensitisation of various stakeholders to importance of ESG issues. The Government is also providing support through targeted subsidies for desirable businesses like renewables, ensuring proper pricing of natural resources, channelizing resources for development of affected communities etc.
While the Government and the regulators have been successful in ensuring that the businesses are sensitized to the importance of these issues, adherence to the best ESG practices is still far from becoming a reality. For, however stringent regulatory reporting requirement we may come up with, no amount of regulatory “push” is likely to ensure that the businesses adhere to the spirit of ESG compliance. It will have to be the investor “pull” factor which will ensure the compliance in spirit and improvement in the reporting practices.
It may be true that following environment friendly, socially responsible and ethical governance practices, requires investment of time and resources and could be seen as return dilutive in the near term due to the associated costs. Besides, there are phases in the business cycles, particularly in the euphoria phase towards the end of bull markets, when the investors typically become less discerning on quality and companies with dubious track records could be seen outperforming companies run with best governance practices, in terms of stock price performance, purely due to optical illusions of valuation gaps. The companies as well as investors are often compelled to overlook longer term benefits under the pressure of short term performance. However, the costs of non-compliance could turn out to be extremely high, often threatening survival of the business.
‘A Lot More Can Be Done On The Investor Education Front’
Indian investors appear to be still on the early parts of that learning curve. This can be seen form the near stagnation of the Assets Under Management (AUM) of our SBI Magnum Equity ESG Fund since it was converted into ESG Fund, in spite its relatively superior performance compared to its peers and the benchmark.
(Amounts in Rs cr)
SBI Magnum Equity ESG Fund
SBI Magnum Equity ESG Fund had the distinction of being the first Fund launched by an Indian AMC with ESG theme. If Indian investors were indeed eagerly waiting to invest in companies scoring high on ESG, then it should have reflected in growth of the Fund assets. However, this does not seem to be the case.
We believe a lot more needs to be done on the Investor Education front. While SEBI has been encouraging AMCs to step up investor education, the same is yet to move up from educating the investors on investment basics to the advanced stage of educating them on importance of ESG issues. The investor education should specifically focus on youth who are generally more open to new ideas. The role of various organisations and groups involved in promoting ESG in India becomes very critical in influencing opinions of young investors through intensive social media awareness campaigns. It is likely that many of these young investors have simply not thought about the impact their investments are causing on environment or the community and simply making them aware about the adverse impacts of ill-directed investments may make a large difference in their future investment decisions.
We believe most of us would be very happy to contribute to the well being of the planet and the society. Most of us will also want to avoid investing into companies that are not well governed. Often all that is required is to bring these issues to the light and leave the investors to take the prudent decision.
(The author is Head – Portfolio Management Services at SBI Funds Management Pvt. Ltd)