Sustainable

Investment in
India
Ritu Kumar, Director, TERI Europe
Dan Siddy, Director, Delsus Ltd

UKSIF Seminar, London

August 22, 2007
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
OBJECTIVES
• Review relationship between ESG issues and portfolio
investment (foreign and domestic) in India’s publicly
listed companies

• Assess implications for:

– Returns on long term investment strategies
– Competition between fund managers
– Reputation and market valuation of India’s listed
companies
– Incentives for improved CSR and disclosure practices
– Progress on India’s key economic & sustainable
development challenges

• Evaluate India’s investment climate for attracting ESG-

enhanced investment and compare with other leading
emerging markets

• Identify ESG-related strengths and weaknesses in

India’s marketplace and recommend practical actions
for closing the gap
OBJECTIVES
! Key issues and forecasts
IMPLICATIONS FOR:
Environmental ! Business risks and opportunities
& social value ! Links with future economic growth
! Long-term investment
drivers ! Links to long-term shareholder value
returns
! CSR culture
Listed ! Transparency & disclosure
! Competition between
companies ! Performance against standards fund managers
! Sustainable core business models
! Brand quality & market
! Role of E&S in valuation & ownership value of companies
Asset owners practices
& managers ! Leadership and service innovation
! Incentives for improved
! Retail investor attitudes
corporate sustainability
practices
Investment ! Transparency & disclosure
frameworks
climate ! Indices & research capacity ! Sustainable national
! Role of stock exchanges economic development
! Public sector pension fund
leadership
! India’s competitive
position versus other
leading emerging
markets
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
SUSTAINABILITY CHALLENGES
POVERTY
Economic liberalisation has created a 300 million-strong middle class and average
annual economic growth of 8.6% but….

• 77% of the population - about 836 million people - live on less than 50 cents a day
• 90% of India’s 457 million-strong workforce work in the unorganised/informal sector
• The number of people classified as ‘poor & vulnerable’ is increasing steadily

WATER
• India’s 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 India’s 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
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 India’s GHG emissions
• Untapped market potential for energy efficiency management estimated at $1,6 billion a year

GREENHOUSE GAS EMISSIONS

• India is the world’s 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)

CLIMATE CHANGE
• India expected to be one of the world’s 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
SUSTAINABILITY CHALLENGES

URBAN AIR QUALITY

AGRICULTURAL SECTOR
STRUGGLING

HIV/AIDS

SCHEDULED CASTES &

SCHEDULED TRIBES

SHORTAGE OF SKILLED HUMAN

CAPITAL
INVESTMENT IN INDIA
Foreign portfolio
investment
Net foreign institutional investment
estimated at $11 billion per annum
India attracts c. 15% of total equity
flows to emerging markets
India’s publicly
Portfolio flows to India outstrip FDI listed companies

Economic growth 9.2% in FY07

Domestic portfolio
investment
300 million ‘middle class’ consumers
83,000 millionaires
$80 billion mutual fund market
Major pension reforms underway
Total market cap $1,009 billion
14th largest market in world
Multinational brands
Strong flow of large IPOs
Substantial overseas listings and
depositary receipts
INVESTMENT IN EMERGING MARKETS

PORTFOLIO EQUITY FLOWS TO EMERGING

MARKETS SURGED TO $94 BILLION IN 2006, 15
TIMES THE 2002 LEVEL
INVESTMENT IN INDIA

INDIAN COMPANIES ISSUED $19 BILLION IN

SHARES IN 2006
“SUSTAINABLE” INVESTMENT

“SRI” ESTIMATED AT $3,790 BILLION

EMERGING MARKET SHARE APPROX. 0.1%

NO CURRENT ESTIMATES FOR EMERGING ASIA
FORTHCOMING IFC/MERCER STUDY
POPULAR INDIAN STOCKS

BAJAJ
CIPLA
DR REDDY’S LABORATOTIES
HDFC BANK
ICICI BANK
INFOSYS
MAHANGAR TELEPHONE
SUZLON ENERGY
TATA MOTORS
CALPERS/DFA: ESG SCREENING

INDIAN COMPANIES
APPEAR TO BE
POORLY POSITIONED
COMPARED TO
OTHER EMERGING
MARKETS
CALPERS/DFA: ESG SCREENING

“FAIL” “FAIL?”
Ashok Leyland
ABB Ltd (India) Essar Steel Ltd
Godrej Consumer Products
Hindustan Lever Great Eastern Shipping
Hindalco Industries
Mangalore Refinery & Hindustan Construction
Hindustan Zinc
Indian Petrochemical
Petrochemicals Ltd Jaiprakash Associates
JSW Steel Ltd
Bharat Heavy Electrical Larsen & Toubro
Nestle India
Petronet LNG
Oil & Natural Gas Co. Ranbaxy Laboratories
Reliance Communications
Videocon Industries Reliance Industries
Sesa Goa
Siemens India Ltd
Sterlite Industries
Sun Pharmaceutical
Tata Steel Ltd
United Phosphorous Ltd
TRANSPARENCY & DISCLOSURE

Many Indian companies have a deep culture of

CSR, 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 India’s largest

quoted companies (results in September 07)

ESG-related business risks rarely (if ever)

addressed in IPO prospectuses
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
ABN AMRO: LOCAL INNOVATION

ABN AMRO LAUNCHES SRI MUTUAL FUND FOR INDIAN

RETAIL INVESTORS, BASED ON ESG SCORING OF S&P
CNX 500 BY CRISIL
DOMESTIC INVESTORS

No data on sustainable investment attitudes in

retail 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)
STRENGTH & WEAKNESSES

• Lack of attention to ESG-related value drivers means many Indian

companies are probably over-valued by long-term investors

• Lack of efforts to develop an ESG-friendly investment climate are

likely to put India at a disadvantage compares to other emerging
markets

• 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 are
not innovating or developing strategic capacity quickly enough

• Enhanced ESG transparency & disclosure by corporates is a

priority (market reaction for forthcoming CDP5 results for India?)

• Less ‘SRI’ screening, more ‘deep’ research needed on ESG

materiality