Sustainable Investment in India Presentation)

8/8/2019 Sustainable Investment in India Presentation)

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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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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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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

Sustainable Investment in India Presentation)

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