Post on 07-Jul-2015
5 September 2011
SRI in India – Challenges and Opportunities
Manishi Raychaudhuri BNP Paribas Securities India Pvt Ltd(91 22) 3370 4346Manishi.raychaudhuri@asia.bnpparibas.com
5 September 2011 2
SRI – its scope and definitions
“Sustainable Investment” and “Socially Responsible Investment (SRI)” used interchangeably. SRI – Investment in publicly quoted or private companies using strategies that take environmental and social (and sometimes governance) issues into consideration.Governance and disclosure related issues are deemed more “important” than “ES” by traditional investors.
Satyam fraud (2009) and consequent erosion of invested capital are examples of price to be paid for not paying adequate attention to “G”.
Traditional view of “ES” is potential distraction and loss of focus from fiduciary duty to shareholders
No drastic example of loss of capital exists for not paying attention to “ES”Except some potential loss of investment for a firm from investors who refuse to invest in firms involved in Sudan, or deemed to be encouraging child labour
Source: TERI, Bloomberg, EMPEA, S&P
Source: TERI, S&P, Bloomberg, EMPEA
5 September 2011 3
Some facts
SRI in India – particularly in public equity - is in its infancyOnly one SRI fund – launched more than 4 years agoSome FII funds use “negative screening” – e.g. not investing in tobacco or alcohol-related businesses, or not investing in companies accused of using child labor.Comprehensive “Environment Audit” still by and large not incorporated in brokers’ report
But Times They Are a-Changin'Private equity and venture capital funds more active in SRIPE funds in which DFIs (IFC, ADB, USOPIC etc) are LPs, must follow certain social and environmental proceduresIDFC PE and Yes Bank PE are other examples of ESG-sensitive investing
Source: TERI report on Sustainable Investment in India 2009
5 September 2011 4
Investment climate in India
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
(US
D b
n)
PE investment in IndiaIndia Market-cap (USD 1.3tn)
Ownership of Indian equity market7.9
9.4
12.4
27.03.9
8.6
12.4
9.4
3.65.4
Consumer Discretionary Consumer Staples Energy
Financials Health Care Industrials
Information Technology Materials Telecommunication Services
Utilities
India Market Structure
Proportion Held (%) Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11Foreign Institutions 13.7 14.6 14.3 14.5 14.5 15.4 15.6 15.4 15.4 Other Foreign 4.3 5.1 4.4 4.6 4.5 4.7 4.7 4.8 4.5 Total Foreign 18.0 19.8 18.7 19.0 19.0 20.0 20.3 20.2 19.9 Total Domestic Institutions 10.4 11.3 10.7 10.9 11.2 10.9 10.5 10.7 10.7 Total Govt Holding 0.4 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.2 Total Non Promoter Corporate Holding 4.2 4.3 4.2 4.2 4.5 4.5 4.0 4.3 4.5 Total Promoters 57.6 54.8 57.1 55.6 56.4 55.7 55.7 55.9 55.9 Government + Promoters 58.0 55.2 57.6 56.0 56.8 56.1 56.2 56.3 56.0 Total Public & Others 9.4 9.4 8.9 8.9 9.1 8.8 8.7 8.5 8.9 Total 100 100 100 100 100 100 100 100 100
-
2,000
4,000
6,000
8,000
10,000
12,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 1H2011
(US
D m
n)
Fund-raising Investment
Source: CapitalLine Bloomberg, EMPEA
5 September 2011 5
The S&P ESG Index
Methodology for inclusion in the index
• Quantitative Score. Each company is assigned a quantitative ranking based on three factors – transparency and disclosure on corporate governance, environment, and social governance as per the company’s published information.
• Qualitative Score. The top 150 companies with the highest quantitative score are selected for qualitative scoring on the basis of independent sources of information such as news stories, websites, and CSR filings.
• Composite Score. A composite score is calculated for each company by summing the qualitative and the quantitative score.
3.8
20.8
16.3
8.24.8
16.7
5.5
6.6
12.9
4.4
TelecomMaterialsITIndustrialsHealth CareFinancialsEnergyConsumer StaplesConsumer DiscretionaUtilities
Composition
Constituents
Titan 3.88Dr Reddy's 3.27Infosys Tech 3.24IndusInd 2.92SRF 2.9Federal Bank 2.85TCS 2.64M&M 2.61Chambal Fertilizers 2.6Wipro 2.58
Source: S&P, Bloomberg
5 September 2011 6
Doing well AND doing good
80130180230280
330380430480
Jan-
05
May
-05
Sep-
05
Jan-
06
May
-06
Sep-
06
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
Jan-
11
May
-11
Sep-
11
(reb
ased
Jan
05
= 10
0)
S&P India ESG Index BSE 200
40
50
60
70
80
90
100
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep
-10
Nov
-10
Jan-
11
Mar
-11
May
-11
Jul-1
1
Sep
-11
Domini 400 S&P 500 MSCI ACWI
Source: S&P, Bloomberg
5 September 2011 7
BNP Paribas Sustainable Development Fund
Inception in 2007 as ABN AmroSustainable Development Fund
Size of fund at inception: $12.3 mn
Current size of fund: USD 0.8 mn
Methodology for inclusion of stocksEnvironmentalSocialCorporate GovernanceValuations
60
80
100
120
140
160
180
Apr-
07
Jul-0
7
Oct
-07
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
Oct
-10
Jan-
11
Apr-
11
Jul-1
1
(reb
ased
Apr
il 200
7 =
100)
BNP Paribas Sustainable Development Fund BSE 200
Performance
Performance
21.3
14.4
14.2
11.1
8.4
5.4
5.25.1Financials
UtilitiesOil & GasTelecomTobaccoCementITPharma
Composition (%)
Source: Bloomberg, BNP Paribas
Bharti 8.85 TCS 2.76ITC 8.43 Cairn India 2.74HDFC Bank 7.88 BPCL 2.66Power Grid 5.95 Federal Bank 2.3NTPC 5.70 Idea 2.29HDFC Bank 3.90 IndusInd Bank 2.2GAIL 3.73 ONGC 2.18Lupin 3.68 Exide 2.13UltraTech 3.33 Ambuja Cements 2.09Asian Paints 2.94 ING Vysya Bank 1.99Tata Power 2.77 Kotak Mahindra Bank 1.92
5 September 2011 8
Venture Capital, Private Equity and othersIndia has only 2 signatories to United Nations Principles for Responsible Investment (UNPRI)
IDFC in “Investment Managers” category andSolaron Sustainability Services in the “Professional Service Partners” category.
Several foreign banks or asset managers with significant operations in India are signatories to UNPRI
HSBC, Deutsche – examples of banksAberdeen AM, Schroders, JP Morgan AM, BNP Paribas AM – examples of asset managersDSP Blackrock, Canara Robeco Mutual Fund, ING mutual fund – examples of domestic mutual funds
In VC and PE – some DFIs (IFC, ADB, USOPIC) – if present as LPs – insist on certain social and environmental procedures to be followed
E.g. Negative screening on child labor, compliance with applicable World Bank guidelinesIDFC PE has significant investment by these LPs
Actis PE – has comprehensive system for incorporating ESG issues into the investment processIL&FS PE – has a dedicated group of professionals to manage ESG issues across its portfolioYes Bank - $200m South Asia Clean Energy Fund targeting investment in 20-25 companiesIDFC PE – ‘green infrastructure’ portfolio of USD 200m
Source: TERI
5 September 2011 9
Social Entrepreneurship
New Ventures India: VC fund for ‘scalable green business opportunities’ by Confederation of Indian Industry (CII) & World Resources Institute
Funds business ventures in Renewable Energy, Energy Efficiency, Water management, Building Technology, Ecotourism areas
MicrofinanceDespite controversies, microfinance provides credit to the unbanked
FINOTechnology solution for financial institutions (Banks, Microfinance Institutions, Insurance) to enable financial inclusion environment for the micro customers.
National Social Entrepreneurship forumAdvising social entrepreneurs and incubate businesses
Source: BNP Paribas, CII, FINO
5 September 2011 10
Government InitiativesSocio‐economic issues Environmental IssuesPoverty and inequity Urban air pollution and congestionFinancial Inclusion Greenhouse gas emissionsFood security Water scarcity and sanitationLand rights and land acquisition for industrial purposes Energy security
Rural electrificationClimate change and its impact on economy
Land Acquisition: Draft land acquisition law mandates fair compensation +Rehabilitation and Resettlement prior to acquiring landEnvironmental impact assessment one of the factors to be considered when government decides to acquire land
Financial Inclusion: Mandatory ‘priority sector’ lending targets to ensure flow of credit to agriculture & affordable housing
Rural employment: ‘On demand’ work or unemployment benefits
Food security: Legal entitlement of highly subsidized food-grains to impoverished sections
Source: BNP Paribas
5 September 2011 11
Government initiatives on climate change
National Solar missionIncreasing production of photo-voltaics to 100 MW/yrDeploying at least 1000 MW of solar thermal power generation
National Mission for Enhanced Energy EfficiencyEnergy savings of 10,000 MW through banding efficiency targets, incentives for energy efficient construction & appliances
National Mission of Sustainable HabitatEnergy conservation building codeUrban waste managementAutomotive fuel economy standards
National Mission for Sustaining the Himalayan EcosystemPreserve biodiversity, forest cover and other ecological values in Himalayas
National Mission for a “Green India” Forestation of 6mn hectares of forest land (expanding forest cover to 33%)
Source: TERI
5 September 2011 12
Companies in Social Entrepreneurship, Green Energy
Some unlisted companies
FINO (financial inclusion)
BASIX, Share Microfin, Spandana Sphoorty, Equitas Micro finance (micro-finance)
Market Avg daily Betacap turnover 6M avg ROE P/BV P/E EPS Growth
(USD mn) (USD mn) (X) (%) (x) (x) (%)
Orient Green Power ogpl in Renewable Energy Producer (Wind, Biomass) 131 0.4 0.948 9.33 0.39 4.06 NA
Praj PRJ IN Biofuels and green technology 289 3.1 1.271 16.00 2.19 12.67 -11%Insolar ISLR IN Solar Energy 64 0.2 1.412 NA NA NA NASuzlon SUEL IN Wind Energy 1,542 24.3 1.310 9.26 0.99 10.21 NAVA Tech Wabag VATW IN Water treatment & Purification 211 0.3 0.608 14.40 1.58 11.05 80%Ion Exchange ION IN Water treatment & Purification 43 0.1 0.844 NA NA NA NA
——————–— 2012E ——————–—
Source: Bloomberg, BNP Paribas
5 September 2011 13
Promoting ESG awareness
Sustainability Reporting (#)
S&P India ESG Index did not employ ESG analystsLack of local expertise
Stray sell-side broker research reportse.g. HSBC, CLSA
No organized effort by brokers to quantify environmental impact
Source: TERI
2002 2003 2004 2005 2006 2007 2008Brazil 26 32 39 60 71 86 103Russia 1 3 4 8 7 14 14India 4 4 7 7 10 14 16China 1 3 2 3 3 13 17
Response to Carbon
Disclosure Project
Answered Questionnaire 26%Declined to Participate 3%No response 71%
5 September 2011 14
Promoting ESG awareness – BNP’s partnership with Trucost
• Financial analysis to identifyrevenues
• Segmental analysis to identify company activities, and assign revenues to these activities
• Send data verification sheet to the company for verification
• Analyse feedback and incorporate it if it iscomprehensive and consistent
• Incorporate in the analysis actual environmental
data, where available and comprehensive
• Generate data‐modeledprofile of the company and
its supply chain with quantities of resources
and emissions
Source: Trucost
5 September 2011 15
Trucost has analysed the environmental performance of >5,000 suppliers,representing $56billion expenditure.
Trucost has conducted environmental footprint analysis of funds worth $2.7trillion.
Trucost data is used by 15 academic institutions (including Harvard, Yale & Oxford University) and is supported by an International Academic Advisory Panel.
Trucost data drives $582million AUM in environmentally optimised funds.
Trucost has been researching, standardising and validating the world’s most comprehensive data on corporate environmental impacts for +10 yrs.
BNP’s partnership with Trucost
BNP shall have exclusive right to use Trucost data over a 12-month period. BNP shall incorporate the results of Trucost’s analysis in company research reports
Source: Trucost
5 September 2011 16
DISCLAIMERS & DISCLOSURES
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Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time.
Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.
*In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.
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