Globally, over $20 trillion of assets use the environment, social and governance (ESG) criteria when it comes to investing. In India though, the concept is yet to take ground.
But a new fund, the second of its kind in India, hopes to change that.
Launched by three ex-Tata Group veterans, the $1 billion ESG Fund for India will partner with Ajit Dayal's Quantum Advisors.
"There is a strong evidence that ESG investment and good returns correlate," says Alan Rosling, the former Executive Director of Tata Sons, in an interview with Moneycontrol.
Rosling is one the three former Tata bosses who are partnering with Mukund Rajan, former Chief Ethics Officer of the Tata Group, and Govind Sankaranarayanan, former Chief Operating Officer at Tata Capital to form the fund.
The $1 billion fund hopes to attract long-term oriented pools of capital that are interested in ESG performance in emerging markets. "These include sovereign wealth funds, pension funds, university endowments, and large family offices," says Rosling.
Excerpts from the interview:
Q: First off, why an ESG fund?
A: ESG investing is the fastest growing equity approach with some $20 Trillion having now been invested. There is strong and growing research evidence that ESG investment and good returns correlate. Investors are increasingly demanding strong ESG credentials to deploy capital. In India so far, there has been no active ESG fund.
Q: The top 500 listed companies in India are required to publish sustainability reports. But apart from that, do you think companies understand the importance of ESG standards in India?
A: India has introduced regulations to promote ESG standards, including the sustainability report and tighter listing requirements/ requirements under law. Going forward, regulators are expected to introduce further changes to match international best practices. The best companies in India are already good by international standards, but overall, India has lagged behind on global trends on ESG standards. So there is a mixed record, even among India’s largest companies.
Q: How do you see the compliance among mid-cap companies?
A: On an average, mid-caps lag behind most of the largest companies on ESG standards, although of course there are stellar smaller companies. Our team believes that many promoters and managers will respond positively to investors who encourage higher ESG standards, not least because higher ESG compliance correlates to better risk-adjusted returns.
Q: With the fund focusing on mid-cap companies, are you also looking for firms that may not follow the standards at the moment, but show promise?
A: Our intent to is to work with corporate India to lift ESG standards, and to make money for our investors by doing so. As such, we will invest behind both great examples of ESG performance and companies which are open to lifting their standards of ESG compliance.
Q: What kind of investors are you hoping to attract? How do you plan to sell the idea of an ESG fund?
A: The typical investors for the kind of fund that we are planning will have long-term oriented pools of capital outside of India and are interested in ESG performance in emerging markets. These include sovereign wealth funds, pension funds, university endowments, and large family offices.
Our investors will typically be seeking to deploy capital behind ESG strategies and so far they have not had the opportunity to do so in India. We believe that the opportunity for investing along ESG lines in India is compelling and the narrative with be appreciated by LPs.