Capital goods, financials, healthcare services, IT services and pharma are best placed within the ESG risk-opportunity framework
Environmental, Social, and Corporate Governance (ESG) investing is set to pick up in India, spurred by global growth of 15% CAGR ($53.7 trillion for CY2012-22 KIE estimate). It began as a risk management tool and has proved to be a sound investment strategy given that global ESG indices outperformed by 5-50% over the past decade. At 117, India ranks relatively low on sustainability amongst 193 UN members but we are encouraged by the recent trend of key stakeholders in India – government, companies and investors – exploring ESG for long-term sustainability. Four out of every five Nifty-50 companies are making public their ESG compliance data while many more have begun building ESG into their operations.
The sustainability quotient of a company requires a close look at materially relevant factors that can impact its financial performance. In fact, ESG materiality for a company will vary according to its sector and the geographical location of operations. The performance of each firm will depend on the effort it has made to mitigate risks and capitalise on opportunities.
ESG opportunities and risks
Capital goods, financials, health care services, IT services and pharmaceuticals, are best placed within our ESG risk-opportunity framework. Consumer staples and telecommunication services with low risk also remain in our preferred list. Automobiles and components, construction materials, electric utilities, metals and mining, oil, gas and consumable fuels are the more sensitive sectors on India’s ESG radar.
The operating landscapes for automobiles and components and electric utilities are seeing technology disruptions, enab-ling new ESG compliant solutions that are also commercially viable. The other sectors on this radar are also seeing more ESG-compliant alternatives emerge. Companies embracing new technologies are more likely to make it through our framework.
These ESG-sensitive sectors are likely to transition towards commercially viable, greener alternatives on the back of tech/ regulatory fillips. The premiums that innovations will have over prevailing products will continue to reduce as the new technology becomes cheaper, and the regulatory cost of ESG-sensitive products/services becomes more expensive. The operating landscapes for automobiles and components and electric utilities are already seeing technology disruptions, enabling new ESG compliant solutions.
Investors in these sectors should align with firms that are nimble and embrace changing technologies. Investors should be watchful for the disruptors that may gain a meaningful market share with viable ESG solutions.
Edited extracts from Kotak Institutional Equities Research report