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Review of Morningstar India Sustainability Index

Sivananth Ramachandran, Manager, New Product Development for Morningstar Indexes talks about the methodology, portfolio composition of Morningstar India Sustainability Index, and the different ways it can be utilized by Indian investors.

Harish Toshniwal: Hello, everyone. Welcome to Morningstar. I'm Harish Toshniwal, Product Manager for Morningstar Indexes. Today, we have with us Sivananth Ramachandran, Manager, New Product Development for Morningstar Indexes, to talk about India Sustainability Index.

Welcome to this edition, Siva.

Sivananth Ramachandran: Thank you for having me.

Toshniwal: So, Siva, can you talk a little more about how these sustainability indexes are created? Can you just talk a little more about the methodology?

Ramachandran: Morningstar Global Sustainability Indexes, of which India Sustainability Index is a part, is built on top of Morningstar Global Markets Indexes. We have partnered with Sustainalytics, a global firm, which provides company-level ESG research. The indexes provide access to best-in-class ESG companies, avoid exposure to companies with recent controversies and deliver a risk-return profile which is fairly close to that of market.

Now, what does it mean? For each company, we assign an ESG score based on things like policies and programs, disclosure and performance in various ESG metrics. We also make deductions for companies which are involved in recent controversies, be it ethics violation or environmental concerns. We target companies with the highest sustainability scores to reach something like 50% of market capitalization and finally, we control for deviations from market benchmark weights when it comes to regions as well as sectors.

Toshniwal: Can you talk a little more about the portfolio in terms of number of constituents, the portfolio holdings, et cetera?

Ramachandran: What our methodology translates for India is that Morningstar India Sustainability Index has about 55 to 60 large and mid-cap Indian stocks, which are about half the market for large and mid-cap universe in terms of market capitalization. The top holdings are not a surprise. We have companies such as HDFC Limited, Reliance, technology majors such as Infosys and TCS, and Hindustan Unilever. The sector profile is very close to that of broad market with sectors such as technology as well as financial services being very well represented.

Toshniwal: So, how is India Sustainability Index being used by the investors? How they can use it?

Ramachandran: The Index can be used in three ways. One, it can be used as a screener for active funds. Let's say, you are an active manager, who believe in fundamentals. But you want to screen for companies with good sustainability practices. Now, this index can serve as a screener for such use case. Secondly, the index can be used as a benchmark for sustainable strategies. And lastly, it can serve as a basis for an investment product. You can think of it as an organic India fund, so to speak.

Toshniwal: Finally, let's talk about the elephant in the room. It's often said that sustainability leads to poor performance of the fund, portfolios. Do you agree to this statement?

Ramachandran: No. Research suggests that considering material non-financial information in your analysis in general leads to better investing outcomes. And as they say, the proof of the pudding is in the eating. Morningstar India Sustainability Index, for example, delivered a return of 14.8% over the period 2012 to 2016 compared to a return of 13.7% for the broad Morningstar India Index.

Toshniwal: Thanks a lot for your time today, Siva.

Ramachandran: Thank you for having me.

Toshniwal: For Morningstar, I'm Harish Toshniwal. Thanks for watching.

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