sustainable investment in india presentation)
TRANSCRIPT
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Sustainable
Investment inIndiaRitu Kumar, Director, TERI Europe
Dan Siddy, Director, Delsus Ltd
UKSIF Seminar, London
August 22, 2007
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ABOUT THE PROJECT
About TERI and TERI-Europe
Foreign Office funding under
Global Opportunities Fund
Co-author: Dan Siddy, Delsus
Limited
Advisory Group:
Nick Robins, Henderson
David Gait, First State
Stephen Hine, EIRIS
Nandan Maluste, Kotak Mahindra
Ravi Narain, National Stock Exchange
Suresh Narayyan, India Index Services
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OBJECTIVES
Review relationship between ESG issues and portfolioinvestment (foreign and domestic) in Indias publiclylisted companies
Assess implications for:
Returns on long term investment strategies
Competition between fund managers
Reputation and market valuation of Indias listedcompanies
Incentives for improved CSR and disclosure practices
Progress on Indias key economic & sustainabledevelopment challenges
Evaluate Indias investment climate for attracting ESG-enhanced investment and compare with other leadingemerging markets
Identify ESG-related strengths and weaknesses inIndias marketplace and recommend practical actionsfor closing the gap
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OBJECTIVES
IMPLICATIONS FOR:
! Long-term investmentreturns
! Competition betweenfund managers
!
Brand quality & marketvalue of companies
! Incentives for improvedcorporate sustainabilitypractices
! Sustainable national
economic development
! Indias competitiveposition versus otherleading emergingmarkets
Environmental& social valuedrivers
Listedcompanies
! Key issues and forecasts
! Business risks and opportunities
! Links with future economic growth! Links to long-term shareholder value
Asset owners& managers
! Role of E&S in valuation & ownership
practices
! Leadership and service innovation
! Retail investor attitudes
Investmentclimate
! CSR culture
! Transparency & disclosure
! Performance against standards
! Sustainable core business models
! Transparency & disclosure
frameworks
! Indices & research capacity
! Role of stock exchanges
! Public sector pension fund
leadership
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INDIA INC: ESG CHALLENGES
Population growth and demographic trends
Poverty remains a huge problem
Agricultural underperformance
Pressures of urbanisation
Water scarcity
Urban air quality
Scheduled castes and tribes
Energy shortages Reliance on coal
Ports, highways etc require massive investment
HIV/AIDS
Climate change
Greenhouse gas emissions
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SUSTAINABILITY CHALLENGES
POVERTYEconomic liberalisation has created a 300 million-strong middle class and averageannual economic growth of 8.6% but.
77% of the population - about 836 million people - live on less than 50 cents a day 90% of Indias 457 million-strong workforce work in the unorganised/informal sector The number of people classified as poor & vulnerable is increasing steadily
WATER Indias demand for water is likely to outstrip supply by 2020 Massive shift to self-provision (70-80% of supply is from groundwater resources) Groundwater being contaminated and depleted Water use efficiency in agriculture in India is one of the lowest in the world Water scarcity leading to conflict between communities, businesses and states
INDUSTRY 50% of Indias largest industrial sites do not meet government standards Massive development of Special Economic Zones, Panipat petrochemical
hub ($2.9 billion), Delhi Mumbai Industrial Corridor ($100 billion) Environmental technologies & services market (eg waste and wastewater
management) estimated to grow to $20 billion by 2020
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SUSTAINABILITY CHALLENGES
ENERGY Power sector at full capacity, shortages common Peak electricity demand will more than double by 2012 over 2003 levels Coal accounts for 60% of power generation and most of Indias GHG emissions Untapped market potential for energy efficiency management estimated at $1,6 billion a year
CLIMATE CHANGE India expected to be one of the worlds worst-affected countries Famine, drought, flooding, malaria, extreme weather events, etc. Water flow in Ganges could drop by two-thirds
Per capita water supply will drop to critical levels Lehman Brothers estimate 5% loss of GDP - higher than anywhere
else
GREENHOUSE GAS EMISSIONS India is the worlds 5th largest source of GHG emissions Emissions increasing rapidly in real terms, but still small in per capital terms
Lack of progress at governmental level (IPPC Fourth Assessment?) India and China top renewables investment league ($12 billion worth of
CDM projects in India)
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SUSTAINABILITY CHALLENGES
URBAN AIR QUALITY
AGRICULTURAL SECTORSTRUGGLING
HIV/AIDS
SCHEDULED CASTES &SCHEDULED TRIBES
SHORTAGE OF SKILLED HUMANCAPITAL
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INVESTMENT IN INDIA
Foreign portfolioinvestmentNet foreign institutional investmentestimated at $11 billion per annumIndia attracts c. 15% of total equityflows to emerging marketsPortfolio flows to India outstrip FDI
Domestic portfolio
investment300 million middle class consumers83,000 millionaires$80 billion mutual fund marketMajor pension reforms underway
Indias publiclylisted companies
Economic growth 9.2% in FY07Total market cap $1,009 billion14th largest market in world
Multinational brandsStrong flow of large IPOsSubstantial overseas listings anddepositary receipts
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INVESTMENT IN EMERGING MARKETS
PORTFOLIO EQUITY FLOWS TO EMERGINGMARKETS SURGED TO $94 BILLION IN 2006, 15TIMES THE 2002 LEVEL
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INVESTMENT IN INDIA
INDIAN COMPANIES ISSUED $19 BILLION INSHARES IN 2006
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POPULAR INDIAN STOCKS
BAJAJCIPLA
DR REDDYS LABORATOTIES
HDFC BANKICICI BANK
INFOSYS
MAHANGAR TELEPHONE
SUZLON ENERGY
TATA MOTORS
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CALPERS/DFA: ESG SCREENING
INDIAN COMPANIESAPPEAR TO BEPOORLY POSITIONED
COMPARED TOOTHER EMERGINGMARKETS
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CALPERS/DFA: ESG SCREENING
FAILABB Ltd (India)
Hindustan Lever
Mangalore Refinery &
Petrochemicals Ltd
Bharat Heavy Electrical
Oil & Natural Gas Co.
Videocon Industries
FAIL?Ashok Leyland
Essar Steel LtdGodrej Consumer ProductsGreat Eastern ShippingHindalco IndustriesHindustan ConstructionHindustan Zinc
Indian PetrochemicalJaiprakash AssociatesJSW Steel LtdLarsen & ToubroNestle IndiaPetronet LNGRanbaxy LaboratoriesReliance CommunicationsReliance IndustriesSesa GoaSiemens India LtdSterlite IndustriesSun PharmaceuticalTata Steel LtdUnited Phosphorous Ltd
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TRANSPARENCY & DISCLOSURE
Many Indian companies have a deep culture ofCSR, but this often means corporate philanthropy
CSR publications common but useful ESG
reporting is rare (TERI Europe program underway)
CDP5: for the first time, 100 of Indias largest
quoted companies (results in September 07)
ESG-related business risks rarely (if ever)
addressed in IPO prospectuses
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INFORMATION ARCHITECTURE
CRISIL Sustainability Index due early 2008 CRISIL, S&P and KLD
Grant support from IFC
Forthcoming CLSA/Trucost research on Emerging
Asia companies including India
European sustainable investment research
houses are outsourcing to India for developed
market equity SRI research
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ABN AMRO: LOCAL INNOVATION
ABN AMRO LAUNCHES SRI MUTUAL FUND FOR INDIANRETAIL INVESTORS, BASED ON ESG SCORING OF S&PCNX 500 BY CRISIL
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DOMESTIC INVESTORS
No data on sustainable investment attitudes inretail market
Indian public sector pension funds are absent
from the sustainable investment agenda
Forthcoming ASrIA project to develop ESG
investment awareness and capacity in Asian
pension funds (including India)
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STRENGTH & WEAKNESSES
Lack of attention to ESG-related value drivers means many Indiancompanies are probably over-valued by long-term investors
Lack of efforts to develop an ESG-friendly investment climate arelikely to put India at a disadvantage compares to other emergingmarkets
ESG issues not significantly affecting companies cost of capital
now, but will do so when market turns bearish
Fund managers and other service providers in the value chain arenot innovating or developing strategic capacity quickly enough
Enhanced ESG transparency & disclosure by corporates is apriority (market reaction for forthcoming CDP5 results for India?)
Less SRI screening, more deep research needed on ESGmateriality