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‘Sustainable stocks have outperformed peers’

Lokeshwarri SK | Updated on October 28, 2018 Published on October 28, 2018

ESG investing doesn’t come at the cost of sacrificing returns: Avendus Capital MD

Avendus Capital will be soon launching its, and the industry’s, first ESG- (environment, social and governance) based fund.

While the fund will invest in Indian listed securities (as per their ESG score), it is structured to accept investments from domestic as well as foreign investors. Abhay Laijawala, MD and Fund Manager, Avendus Capital Public Markets Alternate Strategies, shares details about the fund in an e-mail interaction with BusinessLine.

Can you explain the investment strategy adopted in the new ESG fund?

Facing rising demand from investors, institutional money managers in most markets worldwide want to broaden their long-term investment objectives beyond traditional financial returns, to encompass economic, environmental and societal impacts in building investment portfolios.

The investment strategy adopted by us — in what will be India’s first ESG fund — is to deliver robust long-term capital appreciation through investing only in companies that practise sound ESG policies. Integrated ESG investing is about explicitly evaluating non-financial ESG criteria as additive and complementary to traditional financial metrics.

We will employ a research-driven approach to stock selection, focussing on rigorous assessment of ESG factors, together with risk, volatility and the valuation criteria of stocks. Avendus has exclusively tied up with Institutional Investor Advisory Services (IiAS), a SEBI registered research firm, which will independently put in place a comprehensive ranking framework covering ESG principles.

Is this an alternate investment fund (AIF)? What will the minimum investment in the fund be, and what will be the fund manager fee and charges?

Avendus Capital Public Markets Alternate Strategies, the alternate asset management arm of Avendus Capital, has introduced differentiated products and strategies for investors.

The company launched Avendus Absolute Return Fund in March 2017, followed by Avendus Enhanced Return Fund in December 2017.

The Avendus ESG fund will be the third differentiated strategy from our AIF suite. It will be an alternate investment fund, and the minimum investments will be in line with the stipulated amounts set for similar alternate investment funds.

What returns can one expect from this fund?

Stocks that have scored highly on sustainable criteria have shown that they tend to outperform their less sustainable counterparts.

A study by Oxford University and Arabesque Asset Management in 2014 found a very high correlation between responsible investment and performance. According to their report, 90 per cent of the studies reviewed showed that the cost of capital is lower for companies with higher standards of sustainability.

ESG investing is an additional lens to effectively manage and measure portfolio risk, leading to better investment returns. A Bank of America Merrill Lynch study showed that, relative to fundamental factors, ESG was a better signal of future earnings volatility — based on findings that higher the ESG quintile ranking, lesser the median change in EPS volatility over a five-year period.

Material ESG issues are strategic business matters integral to performance, and hence, an analysis of these is vital to investment decision-making.

According to MSCI, ESG-compliant companies in emerging markets generally outperform general market indices.

The All Country World MSCI index, which invests based on ESG factors, outperformed its parent index by 39 basis points over the five-year period to June 2017.

Similarly, MSCI India ESG Leaders index outperformed the MSCI India index by 120 bps between September 2007 and July 2018.

Investors ultimately want returns. Do you think there will be takers for such funds in India?

At the outset, it must be noted that ESG investing does not come at the cost of sacrificing returns.

As we mentioned, ESG-based investment funds have consistently outperformed their corresponding benchmarks across developed and emerging markets, and even in India, as highlighted by the outperformance of MSCI ESG index over MSCI India.

Integrated ESG financial products in western geographies are witnessing fast-paced growth, and there is a vast body of research and stock evidence demonstrating that ESG does not come with a virtue discount, and outperforms mainstream indices. Considering these factors, we see strong investor interest for ESG funds in India, from an increasingly socially aware and responsible investor base.

How has the global experience been in these kinds of funds?

ESG has become one of the fastest-growing segments in global investments, with assets based on sustainability and ESG factors growing at a CAGR (compounded annual growth rate) of more than 12 per cent over the past few years. In fact, 26 per cent of total assets worldwide — cumulating to $23 trillion — are now managed under the sustainable and responsible investment umbrella.

Investment analysis that focusses solely on financial performance is increasingly being regarded as insufficient. Instead, we now see more and more investors analysing ESG-related indicators alongside financial performance.

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