Manishi raychaudhuri

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Manishi raychaudhuri

  1. 1. SRI in India – Challenges andOpportunitiesManishi RaychaudhuriBNP Paribas Securities India Pvt Ltd(91 22) 3370 4346Manishi.raychaudhuri@asia.bnpparibas.com5 September 2011
  2. 2. SRI – its scope and definitions“Sustainable Investment” and “Socially Responsible Investment (SRI)” usedinterchangeably.SRI – Investment in publicly quoted or private companies using strategiesthat take environmental and social (and sometimes governance) issues intoconsideration.Governance and disclosure related issues are deemed more “important”than “ES” by traditional investors. Satyam fraud (2009) and consequent erosion of invested capital are examples of price to be paid for not paying adequate attention to “G”.Traditional view of “ES” is potential distraction and loss of focus fromfiduciary duty to shareholders No drastic example of loss of capital exists for not paying attention to “ES” Except some potential loss of investment for a firm from investors who refuse to invest in firms involved in Sudan, or deemed to be encouraging child labourSource: TERI, Bloomberg, EMPEA, S&P Source: TERI, S&P, Bloomberg, EMPEA 5 September 2011 2
  3. 3. Some factsSRI in India – particularly in public equity - is in its infancy Only one SRI fund – launched more than 4 years ago Some FII funds use “negative screening” – e.g. not investing in tobacco or alcohol-related businesses, or not investing in companies accused of using child labor. Comprehensive “Environment Audit” still by and large not incorporated in brokers’ reportBut Times They Are a-Changin Private equity and venture capital funds more active in SRI PE funds in which DFIs (IFC, ADB, USOPIC etc) are LPs, must follow certain social and environmental procedures IDFC PE and Yes Bank PE are other examples of ESG-sensitive investing Source: TERI report on Sustainable Investment in India 2009 5 September 2011 3
  4. 4. Investment climate in India India Market Structure Ownership of Indian equity market 5.4 7.9 3.6 Proportion Held (%) Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 9.4 9.4 Foreign Institutions 13.7 14.6 14.3 14.5 14.5 15.4 15.6 15.4 15.4 Other Foreign 4.3 5.1 4.4 4.6 4.5 4.7 4.7 4.8 4.5 Total Foreign 18.0 19.8 18.7 19.0 19.0 20.0 20.3 20.2 19.9 12.4 Total Domestic Institutions 10.4 11.3 10.7 10.9 11.2 10.9 10.5 10.7 10.7 12.4 Total Govt Holding 0.4 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.2 Total Non Promoter Corporate Holding 4.2 4.3 4.2 4.2 4.5 4.5 4.0 4.3 4.5 8.6 Total Promoters 57.6 54.8 57.1 55.6 56.4 55.7 55.7 55.9 55.9 3.9 27.0 Government + Promoters 58.0 55.2 57.6 56.0 56.8 56.1 56.2 56.3 56.0 Consumer Discretionary Consumer Staples Energy Total Public & Others 9.4 9.4 8.9 8.9 9.1 8.8 8.7 8.5 8.9 Financials Health Care Industrials Total 100 100 100 100 100 100 100 100 100 Inform ation Technology Materials Telecommunication Services Utilities India Market-cap (USD 1.3tn) PE investment in India 2,000 1,800 12,000 1,600 10,000 1,400 8,000(USD bn) (USD mn) 1,200 1,000 6,000 800 4,000 600 400 2,000 200 - Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 2002 2003 2004 2005 2006 2007 2008 2009 2010 1H Fund-raising Inv ent estm 2011 Source: CapitalLine Bloomberg, EMPEA 5 September 2011 4
  5. 5. The S&P ESG Index CompositionMethodology for inclusion in the index 4.4 3.8 12.9• Quantitative Score. Each company is 20.8 Telecom Materials assigned a quantitative ranking based IT on three factors – transparency and 6.6 Industrials disclosure on corporate governance, Health Care environment, and social governance as 5.5 Financials per the company’s published Energy 16.3 Consumer Staples information. Consumer Discretiona 16.7• Qualitative Score. The top 150 companies Utilities 8.2 with the highest quantitative score are 4.8 selected for qualitative scoring on the Constituents basis of independent sources of information such as news stories, Titan 3.88 websites, and CSR filings. Dr Reddys 3.27 Infosys Tech 3.24• Composite Score. A composite score is IndusInd 2.92 calculated for each company by SRF 2.9 Federal Bank 2.85 summing the qualitative and the TCS 2.64 quantitative score. M&M 2.61 Chambal Fertilizers 2.6 Wipro 2.58 Source: S&P, Bloomberg 5 September 2011 5
  6. 6. (rebased Jan 05 = 100) 80 130 180 230 280 330 380 430 Jan-05 480 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 S&P India ESG Index Jan-09 May-09 Sep-09 BSE 200 Jan-10 May-10 Sep-10 Jan-11 Doing well AND doing good May-11 Sep-11 40 50 60 70 80 90 100 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Source: S&P, Bloomberg Nov-08 Jan-09 Mar-09 May-09 Domini 400 Jul-09 Sep-09 Nov-09 Jan-10 S&P 500 Mar-10 May-10 Jul-10 Sep-10 MSCI ACWI Nov-10 Jan-11 Mar-11 May-115 September 2011 Jul-11 Sep-116
  7. 7. BNP Paribas Sustainable Development Fund Performance Inception in 2007 as ABN Amro Sustainable Development Fund Financials 5.2 5.1 21.3 Utilities Size of fund at inception: $12.3 mn 5.4 Oil & Gas Current size of fund: USD 0.8 mn Telecom 8.4 Tobacco Methodology for inclusion of stocks Cement 14.4 IT 11.1 Environmental Pharma 14.2 Social Corporate Governance Performance Valuations 180 Composition (%) 160 (rebased April 2007 = 100)Bharti 8.85 TCS 2.76 140ITC 8.43 Cairn India 2.74HDFC Bank 7.88 BPCL 2.66 120Power Grid 5.95 Federal Bank 2.3 100NTPC 5.70 Idea 2.29HDFC Bank 3.90 IndusInd Bank 2.2 80GAIL 3.73 ONGC 2.18 60Lupin 3.68 Exide 2.13 Jul-07 Oct-07 Jan-08 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 Oct-10 Jan-11 Jul-11 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11UltraTech 3.33 Ambuja Cements 2.09Asian Paints 2.94 ING Vysya Bank 1.99 BNP Paribas Sustainable Development Fund BSE 200Tata Power 2.77 Kotak Mahindra Bank 1.92 Source: Bloomberg, BNP Paribas 5 September 2011 7
  8. 8. Venture Capital, Private Equity and others India has only 2 signatories to United Nations Principles for Responsible Investment (UNPRI) IDFC in “Investment Managers” category and Solaron Sustainability Services in the “Professional Service Partners” category. Several foreign banks or asset managers with significant operations in India are signatories to UNPRI HSBC, Deutsche – examples of banks Aberdeen AM, Schroders, JP Morgan AM, BNP Paribas AM – examples of asset managers DSP Blackrock, Canara Robeco Mutual Fund, ING mutual fund – examples of domestic mutual funds In VC and PE – some DFIs (IFC, ADB, USOPIC) – if present as LPs – insist on certain social and environmental procedures to be followed E.g. Negative screening on child labor, compliance with applicable World Bank guidelines IDFC PE has significant investment by these LPs Actis PE – has comprehensive system for incorporating ESG issues into the investment process IL&FS PE – has a dedicated group of professionals to manage ESG issues across its portfolio Yes Bank - $200m South Asia Clean Energy Fund targeting investment in 20-25 companies IDFC PE – ‘green infrastructure’ portfolio of USD 200m Source: TERI 5 September 2011 8
  9. 9. Social EntrepreneurshipNew Ventures India: VC fund for ‘scalable green business opportunities’ byConfederation of Indian Industry (CII) & World Resources Institute Funds business ventures in Renewable Energy, Energy Efficiency, Water management, Building Technology, Ecotourism areasMicrofinance Despite controversies, microfinance provides credit to the unbankedFINO Technology solution for financial institutions (Banks, Microfinance Institutions, Insurance) to enable financial inclusion environment for the micro customers.National Social Entrepreneurship forum Advising social entrepreneurs and incubate businesses Source: BNP Paribas, CII, FINO 5 September 2011 9
  10. 10. Government Initiatives Socio‐economic issues Environmental Issues Poverty and inequity Urban air pollution and congestion Financial Inclusion Greenhouse gas emissions Food security Water scarcity and sanitation Land rights and land  acquisition for industrial  purposes Energy security Climate change and its impact on  Rural electrification economy Land Acquisition: Draft land acquisition law mandates fair compensation +Rehabilitation and Resettlement prior to acquiring land Environmental impact assessment one of the factors to be considered when government decides to acquire land Financial Inclusion: Mandatory ‘priority sector’ lending targets to ensure flow of credit to agriculture & affordable housing Rural employment: ‘On demand’ work or unemployment benefits Food security: Legal entitlement of highly subsidized food-grains to impoverished sections Source: BNP Paribas 5 September 2011 10
  11. 11. Government initiatives on climate change National Solar mission Increasing production of photo-voltaics to 100 MW/yr Deploying at least 1000 MW of solar thermal power generation National Mission for Enhanced Energy Efficiency Energy savings of 10,000 MW through banding efficiency targets, incentives for energy efficient construction & appliances National Mission of Sustainable Habitat Energy conservation building code Urban waste management Automotive fuel economy standards National Mission for Sustaining the Himalayan Ecosystem Preserve biodiversity, forest cover and other ecological values in Himalayas National Mission for a “Green India” Forestation of 6mn hectares of forest land (expanding forest cover to 33%) Source: TERI 5 September 2011 11
  12. 12. Companies in Social Entrepreneurship, Green Energy Market Avg daily Beta ——————–— 2012E ——————–— cap turnover 6M avg ROE P/BV P/E EPS Growth (USD mn) (USD mn) (X) (%) (x) (x) (%) Renewable Energy Producer (Wind,Orient Green Power ogpl in Biomass) 131 0.4 0.948 9.33 0.39 4.06 NAPraj PRJ IN Biofuels and green technology 289 3.1 1.271 16.00 2.19 12.67 -11%Insolar ISLR IN Solar Energy 64 0.2 1.412 NA NA NA NASuzlon SUEL IN Wind Energy 1,542 24.3 1.310 9.26 0.99 10.21 NAVA Tech Wabag VATW IN Water treatment & Purification 211 0.3 0.608 14.40 1.58 11.05 80%Ion Exchange ION IN Water treatment & Purification 43 0.1 0.844 NA NA NA NA Some unlisted companies FINO (financial inclusion) BASIX, Share Microfin, Spandana Sphoorty, Equitas Micro finance (micro-finance) Source: Bloomberg, BNP Paribas 5 September 2011 12
  13. 13. Promoting ESG awareness Sustainability Reporting (#) Response to Carbon 2002 2003 2004 2005 2006 2007 2008 DisclosureBrazil 26 32 39 60 71 86 103 ProjectRussia 1 3 4 8 7 14 14 AnsweredIndia 4 4 7 7 10 14 16 Questionnaire 26%China 1 3 2 3 3 13 17 Declined to Participate 3% No response 71% S&P India ESG Index did not employ ESG analysts Lack of local expertise Stray sell-side broker research reports e.g. HSBC, CLSA No organized effort by brokers to quantify environmental impact Source: TERI 5 September 2011 13
  14. 14. Promoting ESG awareness – BNP’s partnership with Trucost • Financial analysis to identify • Generate data‐modeled revenues  profile of the company and • Segmental analysis to  its supply chain with  identify company activities,  quantities of resources  and assign revenues to  and emissions these activities• Send data verification  sheet to the company  • Incorporate in the  for verification analysis actual • Analyse feedback and   environmental  incorporate it if it is data, where  comprehensive and consistent available and comprehensive Source: Trucost 5 September 2011 14
  15. 15. BNP’s partnership with TrucostBNP shall have exclusive right to use Trucost data over a 12-month period. BNP shallincorporate the results of Trucost’s analysis in company research reports Trucost has conducted environmental footprint analysis of funds worth $2.7trillion. Trucost data drives $582million AUM in environmentally optimised funds. Trucost has analysed the environmental performance of >5,000 suppliers, representing $56billion expenditure. Trucost data is used by 15 academic institutions (including Harvard, Yale & Oxford University) and is supported by an International Academic Advisory Panel. Trucost has been researching, standardising and validating the world’s most comprehensive data on corporate environmental impacts for +10 yrs. Source: Trucost 5 September 2011 15
  16. 16. DISCLAIMERS & DISCLOSURESThis report was produced by a member company of the BNP Paribas Group (“Group”). This report is for the use of intended recipients only and may not be reproduced (in wholeor in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitationsset out herein.The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are expressions of belief based on suchinformation. No representation or warranty, express or implied, is made that such information or opinions is accurate, complete or verified and it should not be relied upon assuch. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. Information andopinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verificationor taken in substitution for the exercise of judgement by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject tochange without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Any reference to pastperformance should not be taken as an indication of future performance. No member company of the Group accepts any liability whatsoever for any direct or consequential lossarising from any use of the materials contained in this report.The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with regard to any and all of thesubject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specificrecommendation or viewsexpressed herein.This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves theacquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securitiesand Futures Commission for the conduct of dealing in securities and advising on securities. This report is being distributed in the United Kingdom by BNP Paribas LondonBranch to persons who are not private customers as defined under U.K. securities regulations. BNP Paribas London Branch, a branch of BNP Paribas, is regulated by theFinancial Services Authority for the conduct of its designated investment business in the U.K. This report is being distributed in the United States by BNP Paribas Securities(Asia) Limited and is intended for distribution in the United States only to “major institutional investors’ (as such term is defined in Rule 15a-6 under the Securities Exchange Actof 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major institutional investors receiving this report shouldeffect transactions in securities discussed in the report through BNP Paribas Securities Corp. BNP Paribas Securities Corp. is a member of the New York Stock Exchange, theNational Association of Securities Dealers and the Securities Investor Protection Corporation. Reproduction, distribution or publication of this report in any other places or topersons to whom such distribution or publication is not permitted under the applicable laws or regulations of such places is strictly prohibited.Information on Taiwan listed stocks is distributed in Taiwan by BNP Paribas Securities (Taiwan) Co., Ltd.Distribution or publication of this report in any other places to persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited.Recommendation structureStock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, therecommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation isHOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most fivekey buys and five key sells in each market at any point in time.Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch betweenupside/downside for a stock based on market price and the formal recommendation.*In most cases, the target price will equal the analysts assessment of the current fair value of the stock. However, if the analyst doesnt think the market will reassess the stockover the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is anassessment of the mismatch between current market price and our assessment of current fair value.© 2009 BNP Paribas Group 5 September 2011 16

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