Sustainable Investing: EIS Posts Annual Returns Above 36%, Beating Stock Markets

Globalization has always led mankind to believe that economic growth and the maintenance of natural resources can never go hand in hand. However, the pandemic has made people, including businesses, realize that sustainability is the key to a better future. These days, more and more people are making conscious economic choices to save the planet. Individuals and businesses are now gradually turning to sustainable investing which can be beneficial both in terms of generating competitive long-term financial returns and positive societal impact. In one such example, the sustainability-focused equity investment product, Earthwise India Strategy (EIS), has demonstrated that it is possible to both “do good” and “make money” at the same time. EIS has generated annualized returns of 36.6% since its inception in January 2020. It has done so by investing in a diversified portfolio of 25-30 stocks chosen based on their contribution to the theme of sustainable economic growth.

Earthwise Investors has released a first-of-its-kind sustainability report for EIS that provides a summary of the sustainability characteristics of the EIS portfolio and how they compare to the broader market (represented by the NIFTY 100 Index) for the 2021 reporting cycle. report is based on Earthwise’s proprietary Net Sustainability Positioning (NSP) framework. The NSP framework is organized around five themes: climate resilience, resource efficiency, human capital, community impact, and inclusion and access. According to the report, during the 2021 reporting cycle, the GHG intensity of the EIS portfolio was 1,447 tonnes per one billion rupees of EBITDA. In comparison, the NIFTY 100 components produced GHG emissions of 59,473 tonnes for producing the same EBITDA. The GHG footprint of the EIS portfolio was only 2.6% of that of the NIFTY 100. Similarly, companies in the EIS portfolio over the same period used 240 MWh of non-renewable energy to produce one billion rupees of EBITDA, while the components of the NIFTY 100 used 17,011 MWh of non-renewable energy to produce the same EBITDA. Even the water intensity of the EIS portfolio was only 2.7% of that of the NIFTY 100.

Among social factors, the employment intensity of the EIS portfolio was 53% higher than that of the NIFTY 100. In terms of diversity, on average, companies in the EIS portfolio had a 50% more diverse workforce than that of the NIFTY 100. constituents of the NIFTY 100. Based on the numbers, EIS has somewhat established a benchmark for other ESG/Sustainability themed programs and funds. Understand various aspects of sustainable investing such as creating a portfolio for the same, Sakshi Kuchrou of FE online spoke with Anshul Rai, Founder of Earthwise Investors.

Q. What does investing sustainably mean? What is its importance today?

Sustainable investing can be defined using three Ps: Prosperity, Planet and People. In other words, investing in businesses that generate superior returns and create widely shared prosperity while protecting the planet and supporting social (people) development. Investing sustainably is more critical than ever. It is widely recognized globally that current patterns of production and consumption are unsustainable, yet 85% of the world’s population lacks even modest levels of prosperity and human development. As a result, companies face new risks and challenges both at strategic and operational level. At the same time, there are also great opportunities – be it clean energy, electric vehicles, sustainable fashion or more inclusive growth. Over the next decade, the winners will be those who embrace the transformative potential of sustainable and inclusive development. As an investor, you should seek to position yourself to benefit from these “mega-trends” – not just to avoid risk, but for larger, existing opportunities.

Q. What are the current challenges facing ESG/sustainability-focused schemes and funds?
The big challenge is the use of “ESG” as a label – therefore, essentially, a sales tool – without real differentiation vis-à-vis a “non-ESG” fund from the same team. This is due to both ignorance and “greenwashing” reasons. Most fund managers see it as a fad, which will fade as the market cycle turns. So there is not much effort to develop the required capabilities. There is also a lack of genuine commitment to the cause of sustainable growth. Investor education is also a challenge. Investing sustainably is somewhat considered charity, i.e. please invest out of the goodness of your heart, rather than out of a desire for a higher return. This is where Earthwise India Strategy (EIS) changes the game. EIS is the only ‘true-to-label’ sustainability focused product in India and our investment objective is to provide superior risk-adjusted returns, along with best-in-class sustainability features.

Q. How do you create a portfolio for sustainable investing?
That’s a very good question. Since there is no single definition of sustainability or consensus on the key characteristics of a truly sustainable investment, most investment professionals really struggle with this question. They are unable to construct a portfolio based on sustainability or to explain/justify their investment decisions from a sustainability perspective. To do this, EIS places sustainability at the heart of its investment process. We only consider companies for investments that meet our criteria for sustainable economic growth. With this clear focus, a traditional bottom-up stock selection process is then used to construct a well-diversified investment portfolio.

Image: Anshul Rai, Founder of Earthwise Investors

Q. What methodology did you use in preparing the report to ensure there was no bias?
Our analysis uses the proprietary methodology, known as the Net Sustainability Positioning (NSP) Framework. The NSP framework is based on globally recognized sustainability principles such as the United Nations SDGs and the International Finance Corporation Performance Standards. We have further improved and integrated the underlying principles into a more comprehensive yet flexible analytical framework – based on our decades of global experience. The NSP framework recognizes that every economic activity is capable of having both negative and positive environmental and social impact. The key is to determine where the balance lies, i.e. whether the NET impact is positive or negative. Just as negative impacts such as pollution or GHG emissions can be ignored, we must recognize positive impacts, such as creating jobs or connecting people to markets and opportunities.

The NSP framework also recognizes that sustainability is a highly contextual concept, depending on the social, economic and even geographical aspects of an economy. The definition of sustainability cannot be the same in Norway and Nigeria. Our methodology captures this crucial distinction. At NSP, we use a combination of quantitative and qualitative factors, each having approximately equal weight.

Q. How did EIS decide which sustainable stocks to add to the portfolio compared to other sustainable companies?
This is a very important part of the overall portfolio construction process. As a company, delivering ecologically and socially sustainable growth counts for little if this growth is not profitable and generates long-term shareholder wealth. Thus, our bottom-up analysis of eligible shares takes into account the economic model, the quality of management, the financial performance as well as the valuation of the company – before deciding to add it to our portfolio. The portfolio is actively managed and we monitor business performance on financial and sustainability matrices.

Q. What do you see as the future for sustainable investing in India given these uncertain times of war and inflation?
The long-term future of sustainable investing in India is very bright. As one of the largest and fastest growing economies in the world, how India develops and achieves middle-income country status over the next decade will matter both for India and for the world. We cannot afford to have unsustainable growth. Sustainability is already a major cornerstone of India
public policy for economic growth and the business sector also respond to this paradigm. Unexpected shocks such as pandemics and wars certainly have the potential to disrupt the long-term trajectory, either positively or negatively. But their effects are likely to be transitory and we “revert to the mean” in the medium and long term.

Q. In your opinion, how can you spread the word about sustainable investing, given that many people still stick to traditional stocks instead of venturing out?
This is a very important question. The key here is to remove the “mystique” associated with sustainable investing and convince them that it is about thematic investing and using long-term macro trends to generate superior returns. Just as people are comfortable investing in themes such as demographics or technological change, they should embrace investments based on contributing to sustainable economic growth.

The other myth that needs to be debunked is that sustainable investing will dilute investment returns. In the minds of investors, sustainable investing is about ‘doing good’, which is, in fact, charity. Most of us will not invest in products if we believe they are designed to produce less than reasonable returns (for a given risk profile). Thus, the investment industry must demonstrate the ability of sustainable investing to generate superior returns, just as EIS has done over the past 2 years.

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