Environmental, Social and Governance (ESG) performance of companies linked to investment decisions have been picking pace in India in 2020. This trend can be observed through the launch of dedicated ESG funds and asset management companies signing up for the United Nations Principles for Responsible Investment. We saw the launch of the first ESG ETF and also 5 ESG Mutual funds in India in 2020 (Ref: https://www.morningstar.in/posts/61198/esg-funds-india.aspx ).
The MSCI ESG Index can be seen consistently outperforming the normal Index. In 2020 you can see a 7% upside for the investors. It is not just last year; you can see the trend across every time segment. (Ref: https://www.msci.com/documents/10199/06d20a9e-bd6b-4ea8-a7a2-31cfb0444273 )
It is the same trend in Nifty. The Nifty100 ESG Sector Leaders Index has also outperformed the Nifty 100 Index since inception, with a 12% CAGR return against 10.8% CAGR return for the Nifty 100. In the last 3 years, the Nifty ESG Sector Leaders Index has returned 8.5% CAGR compared to 5.2% CAGR for the Nifty 100 Index.
The returns from ESG leaders in India have a case. But how good are Indian companies on ESG?
To do this research, I picked up the S&P ESG rating because it covers 99 of the 100 companies in Nifty 100.
The average score of the Nifty 100 in the S&P ESG rating for 2020 is 32 out of a maximum score of 100. That is not a significant score. But, in comparison to 2019 these companies on an average have improved their score by 15.6%. The maximum score in Nifty 100 for a company is 83 and the minimum score is 6.
The distribution of the scores show 40 companies in the score range between 11 and 20. On the higher scores, the next biggest range is 13 companies in the 61 to 70 range.
If we look at the average score across sectors as per Nifty classification, we will see Cement and Construction Products leading the pack with an average score of 62.4 across 5 companies. I am not considering sector representing less than 4 companies as the averages can get skewed. Metals and Mining companies follow with an average of 52.2 across 6 companies. Consumer Goods, Financial Services and Pharma are the laggard sectors.
There is only one direction the ESG prominence will move and that will be northward. It is very important for the boards of Indian companies to take cognizance of this. The race has begun, it is time to hit the pedal.