Globalisation has always led humankind to believe that economic growth and sustaining natural resources can never go hand in hand. However, the pandemic has made people including corporations realise that sustainability is the key to a better future. More and more people are making conscious economic choices nowadays to save the planet. Individuals and businesses are now gradually shifting their focus to sustainable investment which can be beneficial to both in terms of generating long-term competitive financial returns and positive societal impact. In one such example, the Sustainability-led equity investment product, Earthwise India Strategy (EIS), has demonstrated that it is possible to both “do good” and “make money” at the same time. EIS has delivered annualised returns of 36.6% since its inception in January 2020. It has done so by investing in a diversified portfolio of 25-30 stocks chosen on the basis of their contribution to the theme of sustainable economic growth.
Earthwise Investors have published a first-of-its-kind Sustainability Report for EIS which presents a summary of the sustainability characteristics of the EIS portfolio and their comparison with the broader market (represented by the NIFTY 100 index) for the 2021 reporting cycle. The report is based on Earthwise’s proprietary “Net Sustainability Positioning” (NSP) Framework. The NSP Framework is organised around five themes: Climate resilience, Resource efficiency, Human capital, Impact on communities, and Inclusion & Access. According to the report, during the 2021 reporting cycle, the GHG intensity of EIS portfolio was 1,447 tonnes for billion rupees of EBITDA. In comparison, the NIFTY 100 constituents produced GHG emissions of 59,473 tonnes for producing the same EBITDA. The GHG footprint of EIS portfolio was a mere 2.6% of that of the NIFTY 100. Similarly, the EIS portfolio companies during the same period used 240 MWh of non-renewable energy for producing one billion rupees of EBITDA, while the NIFTY 100 constituents used 17,011 MWh of non- renewable energy for producing the same EBITDA. Even the water intensity of EIS portfolio stood at only 2.7% of that of NIFTY 100.
Among social factors, the jobs’ intensity of EIS portfolio was 53% higher than that of NIFTY 100. In terms of diversity, on average, the EIS portfolio companies had 50% more diverse workforce than that of NIFTY 100 constituents. Going by the numbers, EIS has in a way set a benchmark for other ESG / Sustainability-themed schemes and funds. To understand various aspects of sustainable investment such as creating a portfolio for the same, Sakshi Kuchroo of FE Online spoke to Anshul Rai, Founder of Earthwise Investors.
Q. What does it mean to invest sustainably? How important is it in today’s time?
Investing sustainably can be defined by way of three Ps: Prosperity, Planet and People. In other words, investing in businesses that generate superior returns and create widely-shared Prosperity while protecting the Planet and supporting social development (People). Investing sustainably is more critical now than ever. There is wide recognition globally that the current patterns of production and consumption are unsustainable, even as 85% of world’s population lack even the modest level of prosperity and human development. As a result, businesses are facing new risks and challenges at both the strategic and operational levels. At the same time, there are also great opportunities – be it clean energy, electric vehicles, sustainable fashion or more inclusive growth. Over the next decade, the winner will be those who embrace the transformational potential of sustainable and inclusive development. As an investor, you should be seeking to position yourself to benefit from these “mega-trends” – not just for risk avoidance, but for greater and existing opportunities.
Q. What are the challenges that ESG / Sustainability-themed schemes and funds currently face?
The great challenge is the use of “ESG” as a label – so, essentially, a sales tool – with no real differentiation vis-à-vis a “non-ESG” fund from the same stable. This is both due to the reasons of lack of knowledge and “greenwashing”. Most fund managers see this as a fad, which will go away as the market cycle turns. So, there is not much effort to develop the requisite capabilities. There is also a lack of genuine commitment to the cause of sustainable growth. Investor education is also a challenge. Investing sustainably is somehow seen as charity i.e. please invest due to the goodness of your heart, rather than with the desire of earning a superior return. This is where Earthwise India Strategy (EIS) is a game-changer. EIS is the only “true-to- label” sustainability-led product in India and our investment objective is to deliver superior risk- adjusted returns, along with the best-in-class sustainability characteristics.
Q. How can one create a portfolio for sustainable investing?
That is a very good question. Given there is no single definition of sustainability or a consensus on what are the main characteristics of a truly sustainable investment, most investment professionals really struggle with this question. They are unable to either build a sustainability-based portfolio or explain/justify their investment decisions from a sustainability perspective. EIS does this by putting sustainability at the core of its investment process. We consider only those companies for investments that meet our criteria for delivering sustainable economic growth. With that clear focus, a traditional “bottom-up” stock selection process is then used to build a well-diversified investment portfolio.
Q. What methodology did you use while preparing the report to ensure there was no bias?
Our analysis uses the proprietary methodology, known as the Net Sustainability Positioning (NSP) Framework. NSP Framework is based on globally recognised sustainability principles such as the UN SDGs and International Finance Corporation’s Performance Standards. We have further enhanced and integrated the underlying principles into a more comprehensive yet flexible analytical framework – based on our decades’ long global experience. The NSP Framework recognises that every economic activity is capable of delivering both negative and positive environmental & social impact. The key is to determine where the balance lays i.e. whether the NET impact is positive or negative. Just as the negative impact such as pollution or GHG emissions can be ignored, we need to recognise the positive impacts, like job creation or connecting people to markets and opportunities.
The NSP Framework also recognises that sustainability is a highly contextual concept, depending on social, economic and even geographical aspects of an economy. The definition of sustainability can’t be the same in Norway and in Nigeria. Our methodology captures this very crucial distinction. Within NSP, we use a combination of both quantitative and qualitative factors, with each having roughly the same weight.
Q. How did EIS choose which sustainable stocks to add to the portfolio over other sustainable companies?
This is a very important part of the overall portfolio construction process. As a business, delivering growth that is environmentally and socially sustainable counts for little if this growth is not profitable and generate long-term shareholder wealth. So, our bottom-up analysis of eligible stocks takes into account the business model, management quality, financial performance as well as valuation of the company – before deciding to add it to our portfolio. The portfolio is actively managed and we monitor the performance of companies on both financial as well as sustainability matrices.
Q. What according to you is the future of sustainable investment in India, given these uncertain times of war and inflation?
The long-term future of sustainable investing in India is very bright. As one of the largest and fastest growing economies in the world, how India develops and achieves a middle-income country status over the next decade will matter both for India and for the world. We cannot afford to have unsustainable growth. Sustainability is already a major cornerstone of India’s
public policy for economic growth and the corporate sector is also responding to this paradigm. Unexpected shocks such as pandemics and wars definitely have the potential or disrupt the long-term path, either positively or negatively. But their effects are likely to prove transitory and we’ll “revert to mean” in the medium-to-long term.
Q. In your opinion, how can awareness be spread regarding sustainable investment, considering many people still stick to the traditional stocks instead of venturing out?
That is a very important question. The key here is to take away the “mystique” associated with sustainable investing and convince them that this is about thematic investing and using long-term macro trends to generate superior returns. Just as people are comfortable investing based on themes such as demographics or technological change, they should embrace investing based on contribution towards sustainable economic growth.
The other myth that needs to be debunked is that sustainable investing will lead to a dilution of investment returns. In investors’ minds, sustainable investing is linked to “doing good” which, in effect, is charity. Most of us won’t invest in products if we believe they are designed to produced lower than reasonable returns (for a given risk profile). So, the investment industry needs to demonstrate the ability of sustainable investing to generate superior returns, just as EIS has done over the past 2 years.