Nilesh Shah on ESG in investing

By Morningstar |  09-08-21 | 

Nilesh Shah, Group President and CEO at Kotak Mahindra Asset Management, shared his views at a recent ESG webinar conducted by Morningstar. ESG being the acronym for Environmental, Social and Governance.

Is ESG just a fad, or is it here to stay?

ESG is not new.

When the House of Tata set up their first textile mill called Empress Mill in Nagpur in 1877, there were numerous worker welfare initiatives implemented. There was a creche facility for the children of women workers, well-ventilated workplaces, and provident fund and gratuity long before they became statutory in the West.

Good companies have always been governed properly, contributed to society, and been conscious of the environment. That's why they have remained relevant over the years and grown. The ESG framework is a formalisation of good practices on environmental, social and governance, which were carried out for many, many decades.

Going forward, I believe ESG will become mainstream. And today ESG is thematic, and investment is mainstream. Tomorrow ESG will be mainstream, because there will be no investment without ESG.

Could you give us some snippets as to how Kotak Mutual Fund incorporates ESG with the regular fundamental analysis on any stock?

  • Governance

On governance, we have far better knowledge. We talk with our investee companies to ensure that they adopt better governance practices. We have constituted a group at AMFI, whereby we coordinate among fund managers in mutual fund industry, when there is a need, so that they can all take a collective call about a practice in the company.

There was a FMCG multinational company which wanted to levy royalty for lifetime at an elevated rate. It was the negotiation by local fund managers that ensured that the royalty payout was reasonable. There are numerous examples where we have worked together or individually to ensure that better practices are followed at the board. Have we reached our destination? No. It's a journey. And every day we will have to keep on improving.

  • Social

On the social side, we have some amount of knowledge and the challenge is applying global standards to local requirements. What are socially challengeable things in the global context may not necessarily be blindly applicable in the Indian context. We signed up with United Nations Principles of Responsible Investing. It's about $100 trillion AUM where more than 3,000 fund managers have come together. They guide us in terms of what are the best practices around the globe, in terms of environmental sides, social side, governance side. And we try to modify those in incorporating our own research, we try to connect with our investee companies to ensure that they're contributing to the society.

  • Environment

As far as the environment aspect goes, our knowledge is restricted. Recognising our limitation, we joined hands with Climate Action 100. This is a group of fund managers globally which have come together to ensure that the top 100 polluting companies of the world (about 6-7 of them are based in India) engage with them to ensure that they are able to meet Paris Accord. We are the junior partner here, and have joined hands with a senior large international fund manager who is engaging with these companies. By learning from them, we are passing the same message to our investee companies.

How open have corporates been in terms of disclosures and coming to the table to engage with asset managers?

We have generally been investing in good businesses run by good managers. By and large, post 2000 we have avoided companies where businesses were debatable or where governance practices were debatable. And the best example of that was in 2017 where one particular IT company, which was part of the mid-cap index, did extremely well and moved up from 1% to 4% of the index. All mid-cap mutual funds avoided that company from a valuation and governance concern and didn’t invest into it. So, within our universe, which is a small universe out of total listed company in India, I find that there is a huge acceptance for ESG practices.

Some companies are very evolved on governance, some are learning, but they are more than happy to adopt. In terms of social practices, there is focus on CSR requirements and also focus at the promoter level. So, you'll have to evaluate social contribution not only at the company level, but also at the promoter level.

Environmental is the toughest one. If we look at carbon emission, Indian companies say that they should be evaluated on per capita carbon emission. The developed world has already polluted the environment to reach $50,000 per capita GDP. Their standards cannot be applied to our country, which is a $2,000 per capita GDP. And again, we are engaging with them as our own knowledge in this area is limited.

There is a general acceptance for creating a better tomorrow than today. They are more than happy to disclose what they're doing. At the same time, they want local adoption of global best practices. And at some point of time, a parity, not in terms of total emission, but per capita emission. When ozone layer was depleting because of particular kinds of gasses, the global organisations came together to create a credit system, whereby emerging markets were given some amount of monetary incentive, so that they can replenish those particular kinds of gasses depleting ozone layer with something else.

If a carbon credit kind of system is introduced, then I believe that will create a fair amount of positive incentive for our companies to improve even environmental contribution.

By and large, thanks to the regulatory push, thanks to be investor activism, and thanks to their own conscience, there is better acceptability and genuine desire for implementation of ESG practices.

Is governance something that's been paid a fair bit of attention from an Indian corporate perspective?

We are a $2,000 per capita GDP country. And within that, there will be states like Delhi, which will be richer, whereas something like Jharkhand, Bihar will be far more poorer. The American companies social standard will be different from Indian companies, same way a company operating in Delhi or Bangalore or Mumbai will have a different social standard vis-a-vis company operating their plant in Jharkhand or Bihar or Orissa. And which is where I think companies can make a material impact. Right now, we are seeing how corporates are able to motivate their staff and remove vaccine hesitancy, and support the government's effort in faster vaccination. Same way, if corporate India takes, you know, on the responsibility of improving things around us, things will definitely improve. We can't create a flashlight immediately. But all of us can act as a candle to remove the darkness, which is around us, that's also good enough beginning.

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Nitin Kotadia
Aug 11 2021 04:32 AM
 It's a nice learning from you sir.
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