4 ESG insights from Navneet Munot

By Morningstar |  09-09-21 | 

Navneet Munot, managing director and chief executive officer of HDFC Asset Management, shared these perspectives during a recent ESG webinar with Morningstar. ESG being the acronym for Environmental, Social and Governance.

ESG is not black and white.

There are so many conferences and seminars being held online, which has resulted in a lot of carbon emission being reduced due to drastic cut down in travel. And, it makes us very happy.  But in real life, nothing can be viewed in isolation. Look at the economic impact on the hotel industry and the travel industry. This in turn impacts so many lives.

In a virtual event, hundreds or thousands of people watch from their desktops, laptops, iPad, or even phones. They would be consuming a lot of electricity. Is that taken into account? The events are uploaded online, either on a website or YouTube. All this gets stored in server farms which guzzle electricity.

My son likes to watch this Spanish song Despacito, which has been played over 7 billion times on YouTube. Now, if you calculate the energy consumption of the 7 billion streaming of the song on YouTube, it would have led to the same carbon emission as probably 10,000 taxis plying in a city. But, the company that owns the server farm or uploading it on cloud and streaming it, is rated very differently than a company that has a fleet of 10,000 taxis running on petrol or diesel.

This is why I say that ESG is a highly nuanced subject with multiple dimensions.

Exclusion is not the only way.

ESG is fairly new and has only recently been so widely adopted. So some tend to look at it from a historical perspective which relied on exclusion.

Some asset managers may operate on exclusionary parameters - exclusion of certain sectors. But another way to look at it is to launch funds that invest in the best in class in every sector, without specific exclusions. So here the emphasis shifts from exclusion to integration. How do you integrate ESG standards and ESG policies into your overall investment framework to have a positive impact? Here it is necessary to have parameters which get measured so improvement can be tracked, as well as the trajectory when moving towards a low carbon or towards greater financial inclusion.

Our job is not just to vote with our feet. In a country with a $2,000 per capita GDP, we must work together. Policymakers, asset managers, and wider society work must work with the corporate and business sector to create a shared prosperity. If growth over the long term is sustainable and equitable, it is a win-win for everyone.

ESG is not about being activists for the sake of activism. It is not about blindly excluding sectors without taking into consideration the socio-economic context, and the stage of development a country is in. In a country where millions of people are still in abject poverty and do not have access to electricity, the same parameters will not work as it does in the West.

Engagement, Stewardship, Governance.

For me, the acronym would be more apt as Engagement, Stewardship, Governance, rather than Environment, Social, Governance. ESG is about engagement, stewardship, value creation and collaboration.

This is what I think all asset managers in India are trying to achieve over the next several years, as we go from $2,000 to $5,000 or $10,000. In the same journey, the way developed world or maybe some of the other developing countries who have moved past us. So you can look at the journey when China moved from $2,000 to $10,000, what it did to the world and to the planet. India's journey could be very, very different, a lot more sustainable, a lot more equitable, a lot more focused on triple bottom line of both profit, people as well as the planet. And I think that's the most important aspect.

How do we investors participate in the journey of a company going from good to great? How do we take the companies from where they are, to where they can be on all the three parameters on their environmental footprint, on their social impact and social practices, as well as governance? Large institutional investors cannot just vote by their feet, I think it's better to engage proactively constructively with their investee companies.

The quality of financial data in India has improved substantially.

The mandatory Business Responsibility and Sustainability Reporting (BRSR) for the top 1,000 companies will improve the quality of disclosures which are available to the investors on the E, S and G part. Around 80-odd companies came up with integrated reports last year. A lot of companies in India are looking at some of the global standards in terms of integrated reporting or Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB) and the others.

There is a lot of other qualitative information which is available on E and S. Of course, it's a journey and over a period of time we need maybe more quantitative parameters on whether it's emissions, waste, water or other resource consumption. We need more science-based targets for emissions or maybe carbon disclosures which are based on TCFD (an acronym for Task Force on Climate-related Financial Disclosures) and the other frameworks.

We need to be worried about the future climate change. It's a reality. Investors, policymakers, corporates, businesses – the entire ecosystem need to move together and have a just transition over the next several decades to more clean energy. In all this, we have to keep in mind the socio-economic dimensions of the country as well.

There could be more disclosures which are aligning corporate objectives to the nation's objectives. India has taken a very big commitment, both in the Paris commitment as well as the Sustainable Development Goals (SDG) initiatives. So there could be more disclosures on how our corporate objectives are aligning with the national objectives.

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