Kotak ESG Opportunities Fund is among the more recent ESG schemes that was launched in December. But the asset management company was the first to sign up for the United Nations Principles for Responsible Investing, comprising worldwide institutional investors who are signatories to ESG investing. According to Harsha Upadhyaya, President & CIO-Equity, Kotak Mahindra Asset Management Company there is sufficient depth in Indian markets for ESG investing. In an interview with Vatsala Kamat, the engineering graduate also an alumnus of IIM, Lucknow, talks about the nuances of active ESG fund management, and stock picking strategy.
What it is your approach to ESG investing?
We were the first mutual fund house from India to sign up for the United Nations Principles for Responsible Investing (UNPRI). It is a platform of institutional investors, with over 3,300 signatories worldwide and more than USD 100 trillion worth of assets under management as per these guidelines.
Yes, ESG is a nascent concept among Indian investors. But, it has already started to impact stock price and valuation trends here, as we also have a large pool of international funds invested that focus on ESG standards.
At Kotak, we have started integrating our research and investment process with ESG requirements and compliance parameters. We also subscribe to a third-party ESG research from Sustain analytics, a Morningstar company. Having gained experience in ESG research and analysis, we recently launched a ESG focused fund in India, called the Kotak ESG Opportunities Fund.
Does ESG investing deliver better returns compared to broader indices? How does an active fund management style help?
It is too early to comment on our scheme’s returns given that the funds were deployed only in January. But Nifty ESG 100 ESG index has outperformed Nifty 50 index in the past. The standard deviation, which shows how volatile an index is, is relatively lower for Nifty 100 ESG index.
The Nifty 100 ESG index follows market capitalization and the ESG score of a company in constructing the index. This excludes some of narratives of a company that we may like to consider in our portfolio construct. We look at stocks which may not be part of the benchmark index, but which are good on ESG, as well as attractive on the fundamentals. We screen all the investible ideas and come down to 40-60 stocks finally for the portfolio. So that's the idea in having active management.
Do you have a dedicated research team for ESG investing?
Initially, the existing research team that had sectoral responsibilities handled ESG research as well. It was complemented by a third-party independent research outfit (mentioned earlier). But we have recently hired an exclusive resource for ESG analysis, who meets companies along with our sector analysts, but focuses only on ESG analysis of the companies.
What is the response of Indian companies that you interact with, towards ESG? Is there enough depth in the market to invest?
Awareness towards ESG investing is increasing steadily, even in India, though the concept is still nascent for equity market investors. Companies are showing keenness to align to these principles. But the ESG scores also vary across industries. For instance, the IT sector might have better compliance compared to manufacturing sectors such as cement and thermal power, on environmental issues.
Companies in these sectors cannot give up businesses completely and start a new one. Indeed, ESG compliance from an investor standpoint will nudge companies to improve on ESG standards, but it will happen over a period of time.
There is sufficient depth for ESG investments in Indian markets. Only companies engaged in the business of tobacco, alcohol, controversial weapons and gambling operations are excluded. Barring a few companies from these segments, the available universe is quite large.
Many global mutual fund houses are aiming to include ESG concepts in all portfolios. Would this trend come to India?
At Kotak AMC, we don’t have a mandate to convert all of our funds into ESG. But our investment process considers these factors very closely. In fact, some of our portfolios outside the ESG fund too lean towards ESG compliance. For example, the largest equity fund in the country that we manage, called the Kotak Flexicap Fund, has less than 1.5 per cent of the corpus outside the ESG compliance.
How does the concept of ESG in the final run elevate investor returns?
ESG compliant companies have sustainable businesses, which take care of the environment, manage social factors well, and are well governed in terms of managing the business. So, by simple logic, these companies’ have stable earnings growth over a long period, compared to the rest in the investment universe.
The risk to earnings from governance or environmental problems is also less. In other words, focusing on ESG factors before you construct a portfolio helps to eliminate some companies with red flags. So, constructing a portfolio with a focus on ESG issues helps in the long run.