In Conversation with Mr. Chandru Badrinarayanan, ECube

ESG investment in listed companies is still a new concept for retail investors and family offices. Funds like E-cube are providing an investment avenue to investors for ESG participation. For this section, our guest is Mr. Chandru Badrinarayanan, Managing Partner of Ecube. In conversation with Mr. Chandru below, he has shared his expert views and knowledge about this asset class.

Jyoti: What makes you start an ESG fund for the public market in India? What makes your limited partners consider ESG as a theme for investment?

Chandru: ESG funds have been becoming more and more popular across the world. ESG Assets jumped to $30.6 trillion in 2018 from $22.8 trillion in 2016 and are currently around $37.8 trillion. As per an analysis by Bloomberg, they are on track to reach $53 trillion by 2025.

Please see image – AUM of ESG Fund

In India too there is a surge in the AUM of ESG funds which as per data by Morningstar is around Rs.10,000 crore and growing rapidly. When we conceived an ESG fund, we noticed that the focus by most ESG funds was on the large caps in public markets while the ESG focus on mid-caps was next to nothing, though mid-caps hold good promise to reap Alpha from ESG turnarounds. The basic reason was lack of data and the restricted breadth of management and boards in mid-caps as compared to large caps, to analyze ESG risks and ESG opportunities and to execute the same. Hence, we planned a public markets equity fund with an ESG focus on mid-caps but with an active engagement approach.

Jyoti: The emergence of ESG focused fund and Investor participation has grown substantially in the last one decade. What are your views about the changing investment landscape in ESG?

Chandru: Yes, there has been a pick up across the world in ESG funds. There is ample empirical evidence that firms improving on their ESG scores are rewarding their shareholders better as compared to firms with a low ESG score. In India too, there is very good evidence of the same and in fact the MSCI India ESG leaders index is not only outperforming the MSCI India index for as much as 10 years but there is also a positive divergence happening year on year. What this means is, that firms which are ESG leaders are able to enhance their returns for shareholders year on year. This trend has many years to run and is not a flash in the pan syndrome. This is possibly the beginning. As I mentioned before, the action will likely cascade to mid-caps and small-caps in years and decades to come.

Please see image – Net Returns

Jyoti: There are several challenges to incorporate ESG aspects investment decision-making process. What are the critical challenges, and how can we address them?

Chandru: Challenges of incorporating ESG aspects into the decision-making process revolves around frameworks, inadequacy of data and reliability of data. The second part is how do you monitor a firm for ESG risks which sometimes evolve and manifest very rapidly. The core of an ESG framework is materiality i.e. focusing on the factors which are material or important to a particular sector. Arriving at this is important and the SASB (https://www.sasb.org/)  materiality framework is a good starting point for the same. Inadequacy of data and reliability of data continues to be a challenge as we go down the pecking order of firms and this has to be tackled through tapping into unstructured data of the firms and also personal engagement and various checks. Monitoring and active engagement is extremely critical on an ongoing basis and tools based on AI and ML can prove to be handy in this endeavor.

The big elephant in the room however is ‘greenwashing’ or ESG reporting and ESG disclosures by corporates, without an underlying action and basis. This is a big danger to ESG investments. Investment managers & institutional investors should put in place strong stewardship practices to tackle such greenwashing, which can otherwise backfire on their investment returns and reputation.

Jyoti: How is the ESG investment process different from the general investment process from the perspective of Valuation, ROI, and profitability?

Chandru: The ESG investment process can take various forms depending on the policy and approach of the investment manager. It can be a simple exclusion process where the policy is to draw up a negative list of segments which do not fit into the ESG strategy of the investment firm or its investors. These could be sectors like alcohol, gambling, tobacco, nuclear weapons, controversial weapons like cluster mines and a few other such sectors and excluding investment in firms falling under these sectors. Then comes ESG integration which is a very evolved process of assessment of a firm on ESG materiality parameters, ranking them on a score and then shortlisting the firms for investment. The general investment process is mostly a leading process followed by the ESG investment process but in some investment firms, it can be the other way around too. The active engagement process, which I responded to in Q1, is even more involved than ESG integration.

Jyoti: What are the industries/sectors you consider attractive in India from ESG as an investment theme?

Chandru: Across the world ESG leaders have been from firms in sectors such as technology, pharma and FMCG. Firms from the services industry generally have a higher chance to make it to the ESG league table as traditionally they have been less resource intensive and thus have a lesser chance of leaving a carbon foot print. However, that is changing rapidly as services industries have started consuming huge number of resources in the form of electricity and water to power air-conditioned offices, air travel, massive amounts of water & electricity for data centers. Please see https://sustainability.google/ & https://www.wipro.com/sustainability/.  The bitcoin mining industry is another example of a service industry which consumes massive amounts of electricity. Apart from the point about carbon foot print, various other ESG material factors such as diversity, pay gap, employees health and welfare are issues in sharper focus in services industry.

On the flip side we have manufacturing firms moving to cut down emissions in Scope 1 to Scope 3 and in some cases changing their business model. The automobile industry is a prime example of this and so are many electricity producers moving more and more towards renewables in power generation.

In sum, though there are industries / sectors which may look attractive at the outset from an ESG lens, it is essential to dig down much deeper to analyze a firm’s plans, strategies and intent than being taken in by a sector approach in ESG investment.

Jyoti: We are noticing ESG funds have performed better than the market during Covid 19 time. Do you think  COV-19 has forced corporates to consider ESG issues in corporate decision-making more seriously than ever?

Chandru: Returns from ESG indexes have been better for the past many years. The outperformance over conventional indexes have also been increasing. Please see image of performance of MSCI India ESG Leaders vs MSCI India.  

There is a similar pattern in Active ESG funds outperforming their benchmarks and also non-ESG active funds. Though there seems to be more seriousness amongst corporate firms to adopt ESG more seriously due to COVID, the immediate reason for the better outperformance during COVID times maybe that investors interest in better rated ESG firms may have increased during these uncertain times. 

Jyoti: Please elaborate on the vision and investment philosophy of ECube?

Chandru: ECube stands for “Engage and Empower for ESG” – the 3 Es have yielded ECube, our name, and summarize our Vision. The colors in our logo represent what we stand for – Green for protecting the Environment, Brown indicating our concern for the Earth and our focus on Society, and Blue representing Water. The unfolding and upwardly directional leaves represent the growth that we seek to achieve in our endeavors. The cube is a three dimensional square representing stability and permanence. The logo represents our firm’s rootedness in seeking inclusive and rapid growth in our drive towards profit with purpose, underlined by the core values of trust and integrity.

Jyoti: Kindly share some of the guiding points for CFA charter holders and young aspirants to start and excel in their careers in the niche area of ESG investing.

Chandru: Passion is required to succeed in any field and so it is with ESG investing also. Additionally, this is a rapidly evolving field and requires just not science but also wisdom and application of mind to deal with many issues. Both, the science and wisdom require continuous learning and keeping oneself up to date with happenings across the world in the field of policy, services, investments, geo-politics, new methodologies and joining the dots to get the big picture.

Being passionate also means that we practice what we preach. Essentially, being conscious about one’s own carbon foot print and sustainability habits. Only when we internalize ESG and Sustainability can we radiate the wisdom and knowledge outwards.

About Chandru Badrinarayanan

Chandru Badrinarayanan is an INSEAD alumnus and is well versed in the field of ESG, Sustainability, Climate Change, domestic & international Investments, Risk Management, Analytics, Sales & Marketing and has a good grasp of Information Technology, Macroeconomics and Geo-Politics. He is Managing Partner at ECube Investment Advisors a pioneering platform for investments in ESG, Sustainability & Climate Change themes. He was ED & country head for India at MSCI prior to ECube, where he popularized the themes of ESG, Climate Change and ETFs in India. During his 35 year career, he also had stints in commercial banking, bond trading, manufacturing, consumer products sales & journalism.

About Jyoti Soni, CFA

Jyoti Soni, CFA is a Registered Representative of Rainmaker Securities USA. She is working on Late Stage VC, Pre IPO and Secondary Transactions in unlisted equities. She acquired wide variety of experience in investment banking which includes Merger & Acquisition, Foreign Investments, venture capital and private equity transaction at KPMG and Valpro. She holds BE, MBA degrees and FINRA Series 7 & 63 licenses.