ESG data from listed companies is a work-in-progress: Nakul Zaveri 

Sustainability is the key to future growth. This explains the increasing focus on the use of renewable energy to sustain and maintain growing energy needs. Nakul Zaveri, Managing Partner, Relativity Investment Advisors, a sustainability-focused private equity strategy sponsored by the TRUST Group, spoke to Business Today about the investment philosophy of the fund. 

BT: What will be your investment strategy? 

NZ: The first pillar of any business is its financial metrics, the second being environmental, social and governance (ESG) factors, the third being business sustainability along with the impact that the business is creating. Investment professional managers must understand how to integrate the ESG factors while assessing industries to realise their intrinsic value. This explains why private equity investment companies focus on investing in high-growth companies underpinned by technology, innovation and sustainability for a more accessible, efficient and resilient future. So, this is our strategy and we believe that these themes are very long-term themes.  

BT: Why one should be aware of the impact that a business is making? 

NZ: We all need to be aware of what is happening around us and our way of doing businesses and how it is affecting the communities and stakeholders connected with us.  Social license of doing business and a better understanding of human capital becomes even more relevant Therefore, it is important to assess and verify the positive impact alongside financial returns. If you are not able to generate impact in the long run, you will not be able to be competitively placed to do business in the industrial and infrastructure sphere. Businesses need to be socially acceptable, else it would increase the cost of doing business. For example, the renewable energy sector is sustainable. But there are many aspects like community opposition and other factors that we cannot ignore.  

All this begets risk management, thus, making it imperative for us to work with communities that must be taken into confidence before placing the windmills necessary to harness renewable energy sources like wind energy. Herein also comes the social aspect that includes critical matters like promoting women’s empowerment or refraining from using child labour. You do not create an impact in a day. It takes years to foster feelings of equality and individual empowerment relevant to creating value in our society.  

And that's how we look and approach our investments. We are a sustainable and responsible investing firm which integrates ESG factors while analysing financial state of the business. We have experience across sectors including in renewable energy and allied value chain and the treatment of wastewater. We believe that this is the right time to invest in the renewable energy and allied segments because of the increasing possibility of scale, returns and impact.  

BT: What sectors are you looking at? 

NZ: We are presently looking at early growth to mid-stage growth companies and segment businesses we want to invest in. Right now we are excited about four areas - resource efficiency and decarbonisation, food systems, financial inclusion and evolving consumer priorities. We will invest anywhere between $5 and 20 million. We will engage and collaborate with companies to create value in lieu of minority shareholding. We prefer to work with predominantly unlisted companies.  

Access to relevant data on ESG from listed companies is currently still evolving and renders it difficult to actively integrate ESG factors as per our methodology. Even companies are still coming to terms with what level of data to disclose because there are no standards implemented currently.  However, in our case, that's where our skill setis and you get full access to the company details. Therefore, detailed ESG integration is far more possible.

BT: How quantifiable is the ESG metric?  

NZ: ESG is not a puzzle. Rather, it is an additional tool and not a strategy that people think. There are multiple metrics, numerous frameworks and many standards across the world. And every day, these standards are getting more and clearer and well defined. We have now sectoral benchmarks. For example, if you're looking at a personal care company, there are ESG benchmarks that can be applied to that company, which can be quantified and integrated into a financial model. However, for that, you need to be an active ESG engagement investor.  

A passive ESG engagement, most likely on a listed company, will be based on ratings given by MSCI or Bloomberg. In most cases, it is difficult to quantify them because you are relying on their ratings. For example, a large international bank gives very high ESG rating to ITC on ESG factors, though it may not be the right way to look at as ITC has a dominant business segment in a tobacco business and, hence, not defined in as sustainable. A defense/weapons business while very relevant for the country will not fall within the strict definition of sustainable investing and, therefore, is excluded on sustainable investing framework.  
 
BT: How do ESG models perform when it comes to financial returns? 

NZ: We must think about this like investment managers. The reason we are in this business is that we believe that superior risk-adjusted returns can be obtained from these companies. All companies will have to factor in the ESG models in some form. For example, TATA Group has been doing ESG integration is some form without calling it ESG for over 100 years now. And we all are seeing that TATA is the leading Alpha in its field. So superior returns over a long period will be only be generated if you are adapting yourself to the ESG strategy.  

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