Case Study: Integration of ESG Analysis in Emerging Market Equities
May 12th, 2019 | Jason Milne
Investing in India’s rapidly developing economy offers a promising opportunity for substantial returns, yet it also presents unique challenges. As the world’s most populous country and one of its fastest-growing markets with over 4,400 listed companies, India is drawing attention in the global investment landscape. Investments are pouring into the country from institutions as well as the retail arena; some increasing their existing allocation, others making a dedicated initial allocation to the country while others are diversifying or fully divesting from their existing China exposure and into India.
India’s economic growth story is compelling. With a population over 1.4 billion, a rapidly growing middle class and robust economic reforms, India is poised for substantial growth, setting the stage for the domestic economy to thrive. Approximately 40% of India’s population falls within the age group of 18 to 35 years (the highest Gen Z and Millennial ranking in the world) which is propelling the consumer markets and is the major driver of economic growth and development regardless of events in the USA or elsewhere in the world.
India’s infrastructure is rapidly preparing for decades of growth, with examples including the new underground in Mumbai, bullet trains, the network of major highways connecting cities and the rapid increased acceptance of on-line payments. It is clear that India is on a journey to modernization at breakneck speed.
The country has emerged as a global hub for technology, manufacturing and services with major companies moving operations into the country. “Apple Aims to move half its supply chain from China to India where a quarter of the world’s iphones will be made” (Wall Street Journal). “Boeing’s deal with Air India is the biggest in civil aviation history” (CNBC);=. “Amazon will invest $12.9 billion in India by 2030 to build new data centers” (Nikkei Asia). And the list continues…
India is uncorrelated with major markets in the world – as reported by Bloomberg: 0.27 versus NASDAQ; 0.43 versus MSCI World Index; 0.49 versus FTSE and 0.33 versus S&P 500 and is a stock picker’s dream market with significant alpha potential especially in smaller companies outside of the Index. There is an abundance of quality companies that are not yet recognized by the market which offer huge growth opportunities vs. investment in companies that have already been publicly acknowledged and peaked. Indices are backward looking (reflecting successes already realized) and ignore smaller companies which have outperformed larger ones over the past decade due to their agility and ability to adapt quickly to changing market conditions.
However, investing in India is not without its hurdles. Issues such as regulatory complexity, political volatility, environmental degradation and social inequalities pose significant risks. Navigating the complex market structure requires more than just financial analysis – it requires a deep understanding of the Environmental, Social and Governance (ESG) factors that drive investment returns. The ability to accurately identify these factors and apply their impact on the future of a company is imperative to mitigate risk and enhance returns.
ESG Integration
ESG analysis cannot just be an add-on or an after-thought. It must be incorporated throughout all stages of the investment process in order to understand a company’s long-term financial return potential, structural growth drivers and their overall societal impact. This can be achieved through several approaches:
1) Negative Screening: Excluding companies or sectors that do not meet certain ESG criteria. For example, avoiding investments in companies with poor environmental records, unethical labor practices or those where revenues or profits are derived from areas that provide no environmental or societal benefits.
2) Positive Screening: Actively seeking companies that are making significant contributions to sustainable practices, social progress and ethical governance. This includes investing in firms with demonstrated environmental stewardship, social responsibility and robust governance practices.
3) Qualitative assessment: No two companies are alike, and external sustainability rating assessments may not provide sufficient in-depth analysis. Meeting with company management and discussing their approach to the environment, staff and minority shareholders can provide invaluable insights in identifying leaders.
4) Engagement: Engaging with companies to encourage better ESG practices. Investors can use their influence to promote improvements in corporate behaviour and policies. This is particularly important in a market such as India, where ESG investing remains in its infancy.
Furthermore, identifying key performance indicators that can be monitored on a continual basis is imperative to tracking the progress of a company and quantifying commitments and targets. These indicators represent a general set of transparency and ESG standards that firms are expected to meet over time.
Prioritizing ESG factors, as well as traditional financial analysis, enables investors to focus on the next story, not the last, and to thus identify new opportunities before they become mainstream and the broader market catches on.
Conclusion
As India continues its trajectory of economic growth and structural reforms, integrating ESG principles into investment strategies is not only a moral imperative, but can pave the way for long-term value creation and stakeholder prosperity. As global regulatory requirements become more closely aligned and mandated across investment platforms, partnering with skilled and experienced investment professionals is key to successfully meet your targets and ultimate goals.
Embracing sustainability is not just about doing good—it is about harnessing opportunities for growth, resilience and sustainable prosperity in India’s dynamic landscape.
RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.
Author
Mike Sell
Head of Global Emerging Market Equities / Head of ESG
Alquity
