Indian investors should not dismiss sustainable investing

Dan Lefkovitz, Morningstar Index Strategist speaks about the benefits of sustainable investing for Indian investors.
By Morningstar |  05-01-18 | 

Many investors are intrigued by the concept of sustainability but worry that investing with environmental, social, and governance considerations in mind requires a return sacrifice. In fact, such worries constitute the key barrier to the uptake of sustainable investing worldwide, Morningstar has observed since launching an initiative around sustainability in 2016.

Investors, especially in India, should be encouraged by the results of a recent study we conducted into the Morningstar Sustainability Index Family. As background, those indices include the highest scoring publically listed equities within various regions on environmental, social, and governance (ESG) criteria.

Morningstar sources ESG analysis from Sustainalytics, a specialist research firm, which assesses companies relative to their global industry peers. Our sustainability indices do not necessarily exclude objectionable industries. Rather, they emphasise companies following global best practices on ESG factors.

Of the 20 indices in the Sustainability family, 16 have outperformed their non-sustainable counterparts over their lifespan. Sustainability performed well across Europe and Asia. Indices focused on Asia, Asia ex-Japan, Asia-Pacific, Asia-Pacific ex-Japan, Japan, Australia, and India all beat their mainstream counterparts. The differentials tend to be small, but that is by design. Sector and country weights are deliberately constrained to provide market-like exposure.

Let’s dig into the India Sustainability Index. From an inception date in December 2011, when Sustainalytics coverage of Indian equities reached a critical mass, through the end of 2018, the Morningstar India Sustainability Index returned an average of 17.6% per year. That compares to a 16.7% average annual return for the Morningstar India Large-Mid Cap Index, from which it is sourced.

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The Morningstar India Sustainability Index has outperformed through stock selection as opposed to sector allocation. Contributors included above-market exposure to Reliance, HDFC, Tata Consultancy Services, and below-market exposure to Axis Bank, Jindal Steel & Power, and IDFC.

Another conclusion of the study is that the companies favoured by the Sustainability Index Family tend to exhibit superior financial health, better competitive positioning, and lower volatility. As of year-end 2017, the Morningstar India Sustainability Index scored higher on these three dimensions than its mainstream counterpart. This is encouraging because these factors tend to correlate with strong long-term returns. It also supports the theory that companies that pay attention to ESG criteria are acting in their own self-interest.

Using less energy is not just good for the earth, it also saves money. Treating your workforce well is a way to attract and retain talent. An independent board of directors provides an important check on corporate managers.

As a market, India scores below the global median on ESG criteria. Its sustainability profile is superior to that of China, Russia, and even the US. But it underperforms other emerging markets like Brazil, Thailand, Turkey, and Colombia, and lags well behind Western European markets, which lead the world on sustainability criteria.

Some of the best scoring Indian companies on ESG criteria relative to their global industry peers include Tech Mahindra, Wipro, Infosys, GSK, and Larsen & Toubro. Laggards include UPL Ltd., Indiabulls Housing Finance, Ashok Leyland, Torrent Pharmacheuticals, and Motherson Sumi Systems.

Studies show that women and younger investors care most about sustainability. As these demographic segments gain more control of wealth, demand for ESG-oriented investments is likely to grow. Our studies show that paying attention to ESG is as much about value as values.

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Aravind Sankeerth
Jan 8 2018 04:56 PM
Thats an interesting observation.
I felt like saying that in India, the Interest rate plays a key role to determine a lot of things. But the companies mentioned above don't have any debt and hence are totally self reliant on their own cash on books and cash flows from operations. It doesn't impact then in the rising cycle nor are they benefited during the cuts. These are institutions by themselves and have an ecosystem that depends on Macros alone, thats what differentiates them from others apart from having a defensive tag!
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