About 10 years ago a tea manufacturing company using child labour was documented on a TV channel. Within a short span of time, their entire business collapsed as buyers, distributors etc. refused to work with a company that exploits children. That was 10 years ago. Today, ESG stands for ESG - Environmental, Social, and Governance -- investing is being actively used by investors to apply non-financial factors as part of their analysis process to identify material risks and growth opportunities. In a special PMS Bazaar one-hour session, Andrew Holland (CEO Avendus Capital Public Markets Alternate Strategies LLP) and Abhay Laijawala (MD Avendus Capital Public Markets Alternate Strategies LLP) talked about ESG investing trends and showcased their offering: Avendus Capital Large Cap ESG. Read on...

Setting the Tone

Opening the session, Andrew talked about the current issues that are impacting financial markets. Growth is at a premium. With global central banks continuing to be accommodative on interest rates i.e. lower for longer, Andrew expects global growth to pick up pace.

"Asia would be the engine of global growth over the next 5 years...one of the reasons is that millennials have the spending power over this time period. Why Asia? There are 60 million millennials in the US but India and China each have 320 million millennials," said Andrew, who has a wealth of experience spanning four decades across UK, Asia, Japan and Indian markets.

Indian markets have performed well. Addressing the elephant in the room i.e. valuation question, Andrew a bubble is a more pertinent question for the US where SPACs or special purpose acquisition companies could cause a few problems. "...India does not fall into a bubble. I reckon the momentum is intact for 2-3 years. Our view has improved after the 2021 Budget which ranks up there with Chidambaram's 1998 dream budget. India could see earnings continue to rise and that can make re-rating happen," Andrew added.

ESG Basics

Avendus India ESG Fund is India’s first ESG fund and was launched as a Category III Alternative Investment Fund. Avendus is now offering the ESG play on the discretionary PMS platform in a 10-years open-ended tenure.

"Avendus was one of the first one to launch an ESG fund in India. The ESG theme is starting to play out now...but ESG investing is much more than just ESG scoring. What you do after the scoring is more important," said Andrew, under whose leadership, the assets under management of Avendus Absolute Return fund and Avendus Enhanced Return Fund crossed over 5000 crore in one year.

Explaining the PMS ESG fund offering, Abhay Laijawala talked about the growing acceptance of ESG globally. "In 2020, ESG ETFs got $50 billion inflows, 100% growth over 2019. European sustainable funds are breaking new records. Many funds are repurposing themselves as ESG funds given the interest," said Abhay.

Busting the myths about ESG investing, Abhay talked about how ESG investing is not only for 'values based investors'. He said ESG does not not mean portfolio returns are sacrificed and also that ESG is not only about risk mitigation.

"There is a 360 degree analysis. One has to go far beyond the traditional approach. In Environmental, a company has to make a positive impact for a more sustainable future. In Social, fostering the well-being of employees and local communities is key. In Governance, conducting business in a responsible manner is important," said Abhay.

Does ESG deliver alpha in India? Here is an interesting stat. Since February 2019, Avendus Large-cap ESG Strategy has delivered 32.4 per cent returns versus benchmark Nifty 100 which was up 25 per cent. This signifies ESG fund showed an outperformance of 7.4 per cent.

Product Pitch

Avendus Large-cap ESG Strategy has been designed to be acore equity product. It has a high conviction, low portfolio turnover of 15-25 stocks integrating ESG factors alongside mainstream company analysis.

"There is conscious and explicit exploitation of ESG aspects of each company in the portfolio. The fundamental strategy is built on cornerstone return on capital approach together with cash flow generation, capital allocation discipline etc.," said Abhay, who has spent a decade overseeing research coverage of more than 120 stocks across sectors.

While emphasising that Avendus Large-cap ESG Strategy has no exposure to tobacco, alcohol, fossil fuels, and weapons, Abhay explained the ESG rating framework and process overview.

To be in the portfolio, a stock/company needs to have the following financial attributes:

* Sustainable ROCE generation (12% plus)

* Durable double-digit earnings growth

* Low leverage businesses

* Higher reinvestment ratios

* Responsible capital allocation

* Strong and sustainable sales growth

* Low working capital requirement,

* Durable operating cash flow businesses etc.

The current portfolio snapshot shows stocks such as Infosys, ICICI Bank, Axis Bank, HDFC, Kotak Mahindra Bank, Asian Paints, Bharti Airtel, TCS, HDFC Bank being the top weights.

Talking about ESG outlook, Abhay said the prospects are very good as many disruptions are happening which are going to be best addressed by ESG funds.

For more information, please contact info@pmsbazaar.com