Mumbai-based ICICI Prudential Asset Management has licensed a new environmental, social and governance (ESG) index with a view to launching funds for foreign investors seeking exposure to India.
The second largest asset manager in India, which manages $18.2 billion in assets, this month became the first licensee for Thomson Reuters’ CRI India 50 ESG Index. The firm – a joint venture between ICICI Bank and UK insurer Prudential – says ESG could become a differentiator for its international business.
ESG comprises a set of measurement parameters used to define the effects of investments, including standards relating to child labour, safety, bribery and corruption.
The rupee-denominated and Ucits-compliant India ESG index comprises 50 stocks with a minimum free-float market cap of $200 million, weighted according to their respective sectors, and is rebalanced quarterly. ICICI Prudential AM has yet to decide whether to run active or passive portfolios around the index.
Karun Marwah, head of international business at the fund house, said he expects European and North American institutions’ interest in ESG index investments to increase in the next three to four years. Demand could come from both segregated mandates from pensions and endowment funds, or global funds following an ESG strategy, he added.
“Today, investing in India along ESG principles does not exist,” said Marwah. “But foreign investors, especially in the Nordic countries, have asked about it.”
An increase in India ESG investment would likely be preceded by an increase in investors’ single-country exposure to Indian equities*, he noted.
ICICI Prudential AM started building an ESG model portfolio four years ago. It had partnered Standard & Poor’s, which launched an ESG India index in 2008, but the relationship ended as S&P discontinued the product, in order to partner with another service provider on a new ESG methodology.
Meanwhile, some private equity managers in Asia say they are increasingly focusing on ESG issues, driven by demand from clients.
Moreover, interest in ESG benchmarks is being fuelled by guidelines such as Australia’s GN31 code for pension funds, which promotes ethical investment, said Stephan Flagel, Thomson Reuters’ London-based global head of indices.
In August 2011, the country’s Financial Services Council and the Australian Council of Superannuation Investors launched the GN31 guidelines for Australian companies to help firms identify and report their ESG risks. The guidelines enable superannuation funds and investors to compare information and data so they can evaluate and manage ESG risks.
Demand for ESG indices also comes from asset managers in emerging markets who want to win ESG-compliant mandates from places like Australia or continental Europe, said Flagel.
European investors (ex-UK) were the largest holders of dedicated India exposure, at $8.82 billion, or 65% of their total institutional AUM as of the fourth quarter of last year, according to a report released this month by data provider eVestment Alliance.