124: : ESG/EHG: The future of sustainable investing and ESG in India: Arvind Chari and Chirag Mehta, Quantum Advisors

The Elephant in the Room

Show notes:

The ESG backlash is real, and it is polarising. The rhetoric around it exacerbated because of roll backs by corporates and governments on climate/energy commitments. According to a leading ESG publication, Trump’s victory in the world’s second largest democracy, is likely to result in roll backs on climate and ESG regulation in the country and retreat from the global stage. Despite all the noise against ESG - asset managers globally are expected to increase their ESG related AuM to US$33.9 trillion by 2026 (84% growth). The driver for growth for ESG activity is not altruism but value creation.

In India the world’s largest democracy there are reasons for cautious optimism, with the government introducing a slew of policy changes over the last decade, that makes it obligatory for organisations to adopt an ESG lens for sustainability reporting. Since 2022-23, the top 1000 listed companies are obliged to follow the Business Responsibility and Sustainability Reporting framework. The driver of course is India’s ambition to be a 7 trillion economy by 2030. There is lots to be done but the country is on the path.

To discuss India’s journey on ESG and Sustainability reporting I spoke with Arvind Chari and Chirag Mehta, Quantum Advisors in the 124th episode of The Elephant in the Room podcast. The focus of the conversation was global and local trends and Quantum’s own approach to ESG investing. We spoke about 👇🏾👇🏾👇🏾

👉🏾 The drivers for sustainable investing

👉🏾 Responsible (patient investing) and what it means. Adding a 5th P to the 4 Ps investment management - predictability or patient capital

👉🏾 The reason for developing Quantum’s own due diligence process or integrity screening mechanism

👉🏾 How weightage on governance can drive better E and S performance for an organisation

👉🏾 Sustainable investing in the Indian context (considering India needs approx. $200 billion a year), where the country is on the sustainable investing journey

👉🏾 Public equity markets as the low hanging fruit for sustainable investing in India

👉🏾 Whether Indian companies are prepared to meet the regulatory requirements in particular BRSR

We also spoke about the ESG backlash, social license to operate, whether ESG funds perform better than funds that don’t have an ESG lens, the EHG trilemma and The 🐘 in the Room. If sustainability, sustainable investing, transparency and accountability is your thing check out Quantum’s ‘The Little White Book of Governance’.

Disclaimer: Quantum Advisors are not my client and I remain sceptical of the investment management & PE industry and their relentless pursuit of profits. However, we know how critical they are to achieving global and local climate and SDG targets. I was drawn to Quantum's mantra ‘Be good and Do good’ and intrigued by the integrity screen.

Check it out for yourself – links in the comment 👇🏾👇🏾👇🏾

#esginvesting #esg #sustainability #impact investing #governance #Climatehange #SDGs

Episode Transcript

Sudha: Good morning, Arvind and Good Afternoon, Chirag. Wonderful to have both of you on The Elephant in the Room podcast today.

Arvind: Sudha, it's good to have us. Your name of the podcast itself is so interesting, and there are always a lot of elephants in the room to be discussed about so great to be talking to you.

Chirag: Yeah. I echo Arvind and pleased to be here.

Sudha: So, let's get started with a quick introduction. Tell the listeners about probably who you are and what you do.

Arvind: Quantum Advisors the firm that we both work me and Chirag, it's an India based, India dedicated investment management firm. It's the oldest firm in India in that space.

Quantum was founded in 1990 by Ajit Dayal and so we've been championing the cause of investing in India, either through research and advisory or through managing on their own name for now close to 40 years, right?

Quantum specializes in thinking about long term India investing from a very sensible risk adjusted approach. And we also believe, and as you will know over the course of this talk, that we believe in be good and do good. And we've employed that not only in our investment philosophy, but the way we run the firm and the choices that we've made as a firm to be able to deal with putting the investor at the centre of everything that we do.

We have two pools of capital, one is the global investor, the global pension fund, sovereign wealth funds, university endowments, family offices, investing into India. Quantum manages and has strategies and products for that pool of capital. And then there is the Indian investor that the Indian retail or Indian high net worth investor who is investing into India and we have the mutual fund, the Quantum Mutual Fund for that.

I'm Arvind Chari. I'm the chief investment officer of Quantum Advisors, now of Q India UK, I moved to London about two years back to be able to be closer to the global investors. So, I basically fly two flags, one is to tell global investors that they are missing out by not investing in India and, more and more investors need to think about India dedicated.

And to fly the Quantum flag in terms of how Quantum can help long term investors allocated to India in a sensible risk xxxxxxxxxxxxxx. Chirag, who's here as well, Chirag Mehta is the chief investment officer of Quantum Mutual Fund, which is Quantum AMC.

Chirag, if you want to give a quick intro of yourself.

Chirag: Sure. So, I've been associated with Quantum for more than about 18 years now and, it gives us pride. Arvind joined in 2004, I joined in 2006, so we both have been here pretty tenured and have seen cycles, and we really know how the Quantum way of investing benefits investors across these cycles.

So, I am the chief investment officer at Quantum Mutual Fund as Arvind said. I do look at many funds at Quantum. including spearheading our integrity efforts. When you say integrity, the outside world knows it by various other names like sustainability, responsible investing, et cetera. So, I do spearhead that and manage a team that looks at these aspects That's a brief introduction and I managed funds across the board in terms of right from multi assets to gold to small caps to what is called in India as ESG funds. We would like to call it integrity, but it's called ESG funds in India. So that's been a snapshot of what I do.

Sudha: Awesome. So, the focus of our conversation today, as I'd mentioned earlier is responsible investing. What does it really mean for Quantum Advisors when you say responsible investing?

Arvind: Sudha, we actually do not like to use the words, sustainability, responsibility, ESG. Either they've been abused or misused or it is not exactly relevant. What we call ourselves as a measure is integrity investing. And integrity is of course a higher measure to hold onto, but also suggests that there are certain morals or certain ethical framework that you use for your investments or for running the firm, and you don't change it, you live by those standards. We think of ourselves as integrity investing as an idea and everything that we do comes about from that perspective.

I'll just give you a history of the firm, which explains how we got into this aspect of why sensible risk adjustment and integrity is essential to what we do. We started the firm in 1990 and there are two seminal partnerships that Quantum had one was between 92 to 95 with a group called Jardine Fleming which we call Quantum Jardine. That's where we learned two very important aspects of an investment management firm. One is to be independent, right? When you are an investment firm and you're independent, the only thing that matters to you is your unit holders or your investors.

If you're independent, then all you're doing is investing long term capital for your fiduciary investors, which your unit holders. The other thing that we learned from the association is what we built as a integrity screen. Subbu who joined Ajit in 1996, so Ajit and Subbu are the longest serving equity managers maybe around the world now that Charlie Munger passed away. They've had a long history and that's when they built this integrity screen, which is basically a screen to avoid bad management, no matter how large they are, no matter how big they're part of the sector, no matter how big they're part of the indices.

If they don't fit our integrity screen, we will stop, we will never invest in them, we will never put client capital into that. So that was the first learning about being independent and having this integrity screen way back in 1996. And then we learned the process of investing of long term process through an association that we had with Hansberger Global Investors.

Tom Hansberg was the originally founder of the Templeton Group, which we call Templeton Galbraith Hansberger. A lot of our investing style of proprietary long-term value came about from that association with Hansberger Global Investors. And Ajit used to work with Hansberger, and they had a mandate from Vanguard. The Vanguard International Value Fund was managed by Hansberger and Ajit was a lead manager for that product. And that's when we learned about, how do institutional investors allocate long term capital?

Why are those, you know, those four P's that you call about in investment firm people, the philosophy, the process, and the performance. And we added a P on the performance called predictability. How can you ensure that your returns or your managing of money is predictable for investors? We learned all that. From our association with Hansberger and Vanguard. And we added a fifth P to that, which is patient capital because India needs long-term capital and India needs, patient long-term capital to come and benefit from the long-term growth prospects that India has.

So the four Ps of how we have and the then we and the desire a fifth p from our investor. The way we think about allocating is when investors allocate to India, either you're global investors or you're an Indian investor allocating to equity markets or taking on risk, you're increasing your risk profile, right? You don't need to do that, but you're looking to choose a higher return or a higher opportunity and you're increasing the risk profile. And our job at Quantum is to manage that risk. And I spoke about risk not being only standard deviation and market volatility, which can be managed.

There are risks which come about through liquidity, that come about through valuations. And there are risks which are predominantly of our governance, so which companies you invest with? Who do you partner as your local partner? What kind of projects are you investing? And the various aspects of governance that goes into it can have a big impact on you as an investor.

That could be some reputation risk that you invest in a company and that company has a governance problem, it blows out and it comes on the press. Or it comes openly saying that, this big, large investor has invested in this company, and they failed all factors. So, our job as a manager is to manage those kinds of risks, market returns, xxxxxx division we can manage, but these are risks that everybody should be aware of. And we as the manager should be able to manage that risk. So that is essentially what we do across asset classes, be it public equities, in the mutual fund, we also have fixed income and through our associates, we have reinvested in private equity. In all these aspects this factor becomes a very important factor about, whom we are shaking our hands with.

And when we shake hands, do we get our five fingers back and we count that. And if we do not get our five fingers back, we avoid our investing in those firms. So that's the way we think about these entire aspects of responsibility and sustainability for us it all starts with integrity for us as a manager.

And for how we deploy client capital.

Sudha: Wow. Yeah, that's so deeply rooted, from the time that you were set up and you'll have come to this premise where you have the five P's for responsible or sustainable investing. And of course, there's an ethical framework. In the global context. Arvind, now you sit in London, what would you say are the drivers for sustainable investing?

Sudha: And are there trail blazers or peers that you look up to?

Arvind: We don't necessarily look up to any particular peer or maybe in India we don't even think that we have a peer in terms of who thinks about risk in the way we think about it.

But in terms of global, that entire aspect of sustainability depends on the asset class in the first place. In the sense that there could be a lot of public equity investors who look at governance as a factor and there are many who do that, right? We are not the only one who look at governance as a factor. There are many who think about that as a filter or a factor before committing money. The sustainability could also be depending on if you're a climate specific investor, but your goal is say - decarbonization, or your goal is say on the climate aspect so there are firms who bracket themselves as sustainable or responsible from that perspective.

There are a few impact, the impact could be again, climate, the impact could be social, the impact would be inclusion. There are various aspects of it. So the entire bucketing of it depends on what asset class and what is a problem that you're trying to solve. And those can define the different drivers in the global context.

We also know that many are gaming it as well. And it is not all right, we know instances where firms or investment management firms or companies are saying that they are responsible, sustainable, but their actions and their products or their services are not that right. So, people say all kinds of things, if you have a very particular focus and it makes it otherwise, you're all over the place.

In terms of global investing, there's the other aspect of passive investing. So much amount of global capital is now invested passively, which is basically following an index. And if you look at the traditional indices S& P 500, Dow Jones, MSCI, these are the large equity indices that global investors do. These indices do not sift for any aspect of sustainability or governance or responsibility, right? So, there are firms which are saying they're responsible and they're allocating passively through these traditional ETFs, which have no sifting for any of these aspects that you mentioned.

So, there is a lot of dichotomy in terms of what is being said and what is being tried to achieve and the actual outcomes. I'm not saying everybody is doing that. There are some great firms who are doing it and especially if they're asset class specific then they're very much focused.

And that's why as you said, there has been a push back to say, ESG as a factor of investing. Or, calling yourself response sustainable when you are having ETFs or passive indices, which clearly do not meet those requirements. I think there is still a lot of evolving to happen. Firms which put responsibility and sustainability or integrity at the core of everything that they do should be able to do better is what we believe.

Sudha: So clearly passive is very different from what patient investing is which you all are doing. I agree with what I see, my background is communications and reputation. I see that a lot of people have been very quick to jump on the bandwagon and be opportunistic, but it's not something that is embedded deeply into the organization and they're not, truly doing sustainable investing or responsible or even that impact investing. There are lots of words people use, it doesn't show through in how they behave or act.

You referred at the start to the integrity investing. And I read on your website about the integrity screen. What exactly does it mean and why do you have it considering that there are numerous auditing standards and frameworks could you not just work around those to develop the due diligence because this is like a due diligence that you have the integrity screen.

Arvind: Correct. I gave the history of the firm. So, Ajit met a South African gentleman, he doesn't remember his name in 1989. And that gentleman asked Ajit, my founder that, ‘young man, what do you want to do in your life?’

And Ajit said, I want to set up an investment management firm. And he said, I'll give you one piece of advice. When you shake your hands with someone and when you get it back, count your fingers. If there are not five fingers, then never shake their hands again. So that is what we took as a genesis of our integrity screen.

And we applied that to when we are investing in companies, we apply that as a filter in some sense, right? You said due diligence. It can be filter, it can be a positive filter or negative filter but that's where it started. And then I told you about the experience that we had with our joint venture with Jardine Fleming where we had an issue with a very large Indian corporate and they had done a measure which was completely anti minority.

And we had to take a call of not investing and that's when we build this integrity screen as a non-negotiable. That's why we call it integrity it is a moral that we will never give up. We'll learn, we'll understand, we'll change. But there's an aspect of, if we don't get our five fingers back based on whatever standards we apply, we will not invest in that fund.

So that's when it started in about 1996. It was initially about 12 odd parameters, some from the balance sheets, some from related party transactions, but it was still intuitive. So, there are certain questions that we still ask and we used to ask back then to the management, to the CEOs or to the family...