Across the world, investing with a sustainability lens is becoming foundational to how more people want to invest. Much of the industry talk says investors have to make a choice between improving investments or improving the world. But investing success and personalized impact are not binary. It's not a zero-sum game. You don't have to choose one or the other to be successful.
The new agent of resolution is what we at Morningstar call "The New Sustainability." I really like that term. It's the new face of long-term, not short-term, of long-term investing, and it shows us that investors can and are choosing both – to do the right thing and to have great investment returns.
Sustainable investing in India is still nascent.
Having said that, the direction of travel is clear from investors and regulators. In fact, the revised business responsibility and sustainability reporting guidelines from SEBI point to the building sustainability and transparency expectations from all angles.
Our research shows that the 11 funds in our database that have a sustainability mandate through the middle of this year have assets of almost Rs 12cr, up more than 185% over the past year. And 8 of these 11 funds have only launched in the second half of last year. Now, that's a drop in the bucket of the world's total sustainable fund numbers in assets. But you know that this trend is not going to go away, it's only going to get bigger.
Surprisingly, here in India, it's in bonds where we've seen early adoption of sustainable investing innovation. Among Emerging Markets, India has the second largest volume of outstanding green bonds, and it's consistently the second largest issuer after China. In fact, there's been a growth spurt this year in ESG labelled bonds, with issuance now exceeding $6 billion. That's more than in any previous full year, and it's expected to be double that amount this year.
The New Sustainability takes many routes, but they all generally span a spectrum of six approaches. Read it in detail here: The Morningstar Sustainable Investing framework.
Some of these approaches are focused on avoiding negative outcomes, while others are more about advancing positive outcomes. They're not mutually exclusive, and investors often combine several or all of them to varying degrees, depending on what you prefer.
Applying exclusions is well known. It's fairly simple; you're excluding certain companies for being engaged in things like tobacco, alcohol, controversial weapons, gambling, those kinds of things. So, companies like ITC are diversifying away from their core business, because they understand that investors are starting to march in this direction.
Another increasingly common approach, which I like better than exclusions, is limiting ESG risk. This is about avoiding investments with a high degree of material ESG risks. Sustainalytics ESG risk rating is the primary enabler of this approach. It measures a company's exposure to material ESG risk and how good a job it's doing in managing those risks. The Morningstar Sustainability Rating rolls up these company-level ratings at the fund level. And in fact, today one-third of the nearly 50,000 funds with a sustainability rating carry an impressive 4 or 5 globes. And the number of funds that will receive this rating will grow by about 20,000 next month. That's when we're adding the country risk rating to our methodology, thus adding coverage for fixed income, allocation and alternative funds.
Domestic Indian equity sustainable funds tend to limit ESG risks quite well. They hold high Morningstar sustainability ratings. In fact, 85% of overall sustainable funds by assets hold the best rating of its kind, 5 globes. That's a great spot to be starting from.
Let's take the Nifty100 ESG Index, for example. It's tilted based on the ESG risk rating Sustainalytics assigns to each company in the index, and it limits ESG risk by excluding companies that have a category 4 or 5 controversy level from Sustainalytics. So, that's why you won't find the company like Vedanta in the index, because our sustainability research give it a severe ESG risk rating. It also has a category 4 controversy level because of its involvement in recurring environmental controversies. The Tuticorin copper smelter owned by its subsidiary Sterlite shut its doors in 2018 after residents complained about harmful emissions that are believed to have been sulfur dioxide. And Vedanta's iron ore operations in Goa have faced regulatory pressure for improper shipping practices to things like water and air pollution. The operations have been halted by a ban across the entire region. Now, that's real risk-taking hold, and it's ultimately up to you as to how you factor it into a portfolio. But we give you the scorecard to get started.
Seeking ESG opportunity is actually my personal favorite. It's what we also call positive screening, because it's the opposite of avoidance strategies. You emphasize companies when it comes to positive screening that are well-positioned to do well in a more sustainable economy rather than throwing those out who fare poorly.
Two global asset managers, HSBC and BNP Paribas, have launched locally domiciled feeders into their global sustainable themed funds – the BNP Paribas Aqua Fund and HSBC Global Climate Change Fund.
Investors can also look to funds with the Morningstar low carbon designation, which are plentiful at just over 10% of all open-end funds and ETFs in our global database. I imagine many more of these will be coming to India soon.
The last and least mature sustainable investing approach is assessing impact. This is an important one because it allows an investor to connect their activities to an outcome. And they want more of this. This might mean aligning an investor's investments with the UN Sustainable Development Goals. Or in fixed income, it means considering what activities a bond's proceeds will finance. Investors have the intent, but they want the clarity on data and measurement.
Wrapping up
No matter the combination, each of these approaches provides a way for investors to find their own path to sustainable investing. Embracing these six modern investing methods is how you can help investors choose both investing success and personalized impact.