Avendus Capital Public Markets Alternate Strategies, the alternate asset management arm of Avendus Capital, has announced the plan to launch an ESG (environment, social and governance) based fund. Avendus has exclusively tied up with Institutional Investor Advisory Services (IiAS), a SEBI registered research firm, who will put in place a robust ranking framework covering ESG principles.
Avendus Capital Public Markets Alternate Strategies LLP is an investment manager to SEBI Registered Category – III Alternative Investment Fund – Avendus Alternate India Fund. So, it can be safely assumed that the ESG fund will be on the AIF platform, which has a minimum investment size of Rs 1 crore. ESG investing is a fad, which has caught the imagination of investors for quite some time now.
Think of ESG investing as a form of impact investing where investors besides seeking positive returns also consider and evaluate the long-term impact that business practices have on society, the environment and the performance of the business itself.
In this style of investing, E stands for Environmental. The metrics for ‘E’ are Direct energy consumption, Carbon intensity, Indirect energy consumption, Energy intensity, Primary energy source, Renewable energy intensity, Water management, Waste management, Environmental policy, and Environmental impact.
The Social or ‘S’ metrics are CEO pay ratio, Gender pay ratio, Employee turnover ratio, Gender diversity, Temporary worker ratio, Non-discrimination policy, Injury rate, Global health policy, Child and forced labour policy, Human rights policy, Human rights violations, and Board diversity.
The Governance (G) metrics are Board separation of powers, Board transparent practices, Incentivized pay, Fair labour practices, Supplier code of conduct, Ethics code of conduct, Bribery, Tax transparency, Sustainability report, Other framework disclosures, and External validation assurance.
Does ESG work
Companies with strong sustainability scores show better operational performance and are less risky, as per Avendus. Also, investment strategies that incorporate ESG issues outperform comparable non-ESG strategies. Stocks of sustainable companies tend to outperform their less sustainable counterparts by 4.8% annually.
In the period between September 2007 and July 2018, companies in the MSCI India ESG (Environment, Social and Governance) Leaders Index delivered a gross annualized return of 11.67% versus 7.52% for the companies in the MSCI India Index, according to a note by Avendus.
As per a Bank of America Merrill Lynch study, stocks that ranked within the top third by ESG scores outperformed stocks in the bottom third by 18% percentage points in the 2005-2015 time period.
Relative to other fundamental factors, ESG is also apparently a better signal of future earnings volatility, based on findings that the higher the ESG quintile ranking, the lesser the median change in EPS volatility over the next five years.
Interestingly, investors who used above-average ESG scores to guide their stock picking would have avoided 15 of 17 corporate bankruptcies between 2008 and 2016!
Abhay Laijawala, who recently joined Avendus from Deutsche Securities, will be the lead fund manager of the ESG Fund. Laijawala has worked with JP Morgan, Citigroup, DSP Merill Lynch, HSBC and BZW Barclays. Alok Vajpeyi, Chairman, Andrew Holland, CEO, and Vaibhav Sanghavi, Co-CEO will continue to lead the alternate strategies business of Avendus.
Dr Rakesh Mohan (ex-RBI deputy governor) and Amit Tandon, Co-founder and MD of IiAS, will join the fund’s advisory board.
Previous Avendus funds
Avendus Capital Public Markets Alternate Strategies had launched the Avendus Absolute Return Fund in March 2017 and followed it with the Avendus Enhanced Return Fund in December 2017. Between the two funds, AUM has risen to almost USD 1 billion within 15 months of launch.
ESG on MF platform
Socially responsible investing products are already available on the Indian MF platform. There is the Rs 550 crore Tata Ethical Fund, which was launched in 1996. There is the Rs 35-crore Taurus Ethical Fund, which was launched in 2009. The Reliance ETF Shariah BeES is a minion Rs 3 crore fund (also launched in 2009). SBI MF’s SBI Magnum Equity Fund from this year has now become SBI Magnum Equity ESG Fund. This fund is right now the only fund in the Indian mutual funds industry to invest in companies that follow the ‘ESG criteria’. Do note SBI fund-house had launched ‘SBI Growth With Values Portfolio’ (focused on ESG and SRI principles), under its Portfolio Management Services (PMS) in 2016.