How ESG made their investors wealthy?

A perception exists that incorporating ESG factors into the investment process will hurt performance. However, we believe that ESG issues will increasingly impact long term shareholder returns for companies. It is imperative for companies to focus on all forms of capital – financial, social, and human and natural – and to incorporate the true cost of their business operations by measuring the impact their actions can have on society and the environment. Thus, responsibility and profitability are not incompatible, but in fact wholly complementary.

Various academic researches undertaken over the years and the performance of ESG indices seem to indicate a positive correlation between sustainability and economic profitability.

Not only has the MSCI India ESG Leaders index outperformed the Equity index over the period, but it has also protected downside risk better.

The ESG indices have also performed reasonably well in comparison with the BSE Sensex and Nifty Index.

Companies such as Marico and Shree Cement experienced significant sustained increase in their valuation multiple by focusing on sound ESG principles. Besides enhanced market valuation, strong ESG can also help in:

  • Fund raising in an environment characterized by shallow bond markets and a banking system under stress
  • Insertion in overseas supply chains that prefer companies with strong ESG practices.
  • Improved credit rating, lower borrowing costs, lower insurance premia, and greater acceptance from investors.

IMPROVING ESG NARROWED THE GAP BETWEEN MARICO AND UNILEVER INDIA

  • Hindustan Unilever is a subsidiary of the multinational company, Unilever. Marico is one of India’s leading consumer products companies operating in the beauty and wellness spaces.
  • Key ESG-linked improvements yielded multiple benefits including better long-term strategy, lower costs, improved operational efficiencies, and greater brand loyalty.
  • Operating costs as a % of revenues dropped from 91% in 2002 to 84% in 2018; Marico’s credit rating improved from AA+ Stable in 2015 to AA+ Positive in 2017 and AAA in 2019.

Source: Bloomberg Finance LP

MARICO'S SUSTAINABILITY INITIATIVES

Source: Company Filings, Sustainability Reports

IMPROVING ESG RESULTED IN SUPERIOR MULTIPLES FOR SHREE CEMENT V/S MARKET GIANT ACC/HOLCIM

  • Shree Cement is among the top 3 cement companies in India; ACC is one of the oldest cement companies in India, now part of the Holcim Group.
  • Shree’s rating has moved from AA+ Stable in 2015 to AAA in 2017

Source: Bloomberg Finance LP

SHREE'S SUSTAINABILITY INITIATIVES

Source: Company Filings, Sustainability Reports

Companies that focus on ESG issues are likely to have a lower risk profile and may be better prepared to deal with possible negative externalities. While the ESG framework and measurement of direct costs to society and the environment are still an imperfect and evolving science, adopting a sustainable framework for a business should positively impact a company’s social license to operate and allow it to deliver superior returns over the long term.

To conclude, by investing in sustainable businesses with sound ESG practices, one can do well by doing good and there is no reason to choose between “making money” and “making a positive difference” to the society.