ESG investments need to be more than just green: family office investor
While the environmental, social and governance (ESG) factor is an important consideration in today’s investment decisions, it must not cloud the investor’s judgement by becoming an end in itself, said the head of a single family office in Singapore.
“So, I'm not trying to have a badge on my jacket which says great ESG investments. I'd much rather have a solid portfolio performance, where ESG is one of the factors that I consider,” said Harsh Vardhan Rungta, chief executive of Carbon Graphite Advisors.
Carbon Graphite — with more than US$50 million in capital — was set up as a single family office in the city-state in January 2020 by Graphite India, which is owned by the Kolkata-based K K Bangur family.
Graphite India is the world’s third largest maker of graphite electrodes, the main heating element in an electric arc furnace where scrap metal is melted to produce new steel. The manufacturing process of graphite electrodes requires high energy consumption and emits carbon into the air.
“Just because the parent company’s businesses are energy intensive, ‘Should the family office be trying to invest in more green initiatives?’ is not really such a linked subject,” said Rungta, who joined the family office in June from Bank of Singapore, where he was formerly managing director.
He said that while he cannot change the nature of the family business, steps have been taken by the parent company itself to invest in energy-saving and carbon reduction technologies.
Graphite India acknowledges on the ESG page of its website that its operational process “consumes a large amount of energy, generates enormous heat, various gases and dust particles,” but said it has taken measures such as replacing fossil fuel with gas and alternative clean energy sources and investing in pollution control equipment to reduce its carbon footprint.
Rungta said there is an overkill in ESG in recent years, particularly in the investment industry.
“If we were asset managers, then I would sell that story 10 times over because every time, I need a story to sell — but as a family office I don’t need to sell a story to the market every day,” he said.
“So ESG has become a story for every asset manager to wrap and sell itself. Where's the gap in the portfolio? You don't have anything which fits this theme? Maybe I can push in something with that.”
Carbon Graphite’s chief investment officer Saurabh Rathi likened ESG to the early days of the Internet in the 90s. “Yes, the story is real, but it’ll take at least two decades for it to mature and for us to really understand what the rules of this game are,” he said.
“As of now, it is just hype, it’s like a dotcom. You just buy because it has an ESG label on it. But a lot of people will lose a lot of money by just following that,” added Rathi, who joined the family office also in June from Bank of Singapore, where he was executive director.
He advocates a balanced approach to ESG investing to achieve positive sustainability outcomes. In his view, fossil fuels are still needed to support economic developments globally, while efforts are being made concurrently to develop alternative renewable energy sources.
“ESG really doesn’t work without the help of natural fossil fuels. We need fossil fuels… investments have to be made there,” he said, adding that the cutback of bank loans to oil and gas companies and coal mines over the last decade has led to the current shortages.
ESG will still be a factor in Carbon Graphite’s investment strategy, but it is not going to be a game changer, he said.
Family offices with businesses in heavy industries like Carbon Graphite come under scrutiny sometimes because of the perceived contradiction in the sustainability profile between them and their family business.
Gunung Capital, a Singapore-based family office which invests on behalf of Gunung Raja Paksi, an Indonesian family business that is involved in steel production, says it leverages its experience in helping the family business with its decarbonisation efforts to support other heavy industry companies make the green transition.
Also read: Gunung Capital sets its sights on ESG assets with $500 million war chest
Rathi said the family office is looking at the mobility sector, particularly the EV (electric vehicle) space and battery storage technologies.
“We are waiting for the hype to die down, which is happening now. Hopefully, we’ll see more reasonable valuations there. That’s a space we would like to look at,” he said.
Another area of interest is renewable energy and its supporting industries. Rungta said the family business has invested in an 18-megawatt hydropower plant in the southwestern Indian state of Karnataka to meet its electricity needs through a clean energy source.
“India is one of the leading countries in terms of renewable projects such as solar, wind, and hydro. We would be keen to see if we can invest further in that space,” he said.
The family office is also looking at graphene-related technologies that could potentially reduce the carbon emission of concrete production significantly. Graphite India has invested in a US-based graphene production company.
“So, now I can’t change the basic nature of my business, but I do want to invest in areas which could have a big impact on things in the future,” said Rungta.
Also read: Singapore family office prefers private deals over public markets