At SBIFMPL, we integrate ESG factors into our research and investment decision making process. ESG research focuses on the critical environmental, social and governance factors which can have a material impact on the long-term sustainable performance of the company. We firmly believe companies with improved management of ESG practices, can optimise their business models thereby increasing productivity, creating a distinct competitive advantage and increasing consumers’ brand trust to deliver sustainable shareholder value. It also presents an avenue to effectively manage risks as well as take advantage of opportunities. This will not only unlock greater value for the company and its shareholders, but also contribute to the desirable social and environmental outcomes we believe in.
SBIFMPL has developed a fundamental, bottom-up investment framework to evaluate companies on ESG for its equity investments. ESG analysis is a mandatory component of our equity initiation reports. The first step involves a thorough financial analysis through SBIFMPL coverage. This is followed by an in-depth ESG analysis to determine final investment recommendations. We have a two-pronged approach for integrating ESG considerations in our equity portfolio:
Internal Framework for ESG integration: We have formulated an internal framework to score the ESG performance of every company in our coverage. Our ESG analysis is based on a Best-in-Class approach. The methodology consists of scoring companies on their ESG practices on over 40 parameters related to a firm’s disclosures on environmental, social and governance initiatives and aims at assessing its compliance as well as pro-active readiness for ESG issues on a scale of 1-100. The scores are assigned based on data available through primary and secondary sources. Material issues like carbon emissions, air emissions, waste management, water consumption, afforestation, effluent management and energy efficiency etc. are covered under the environment segment. The social aspect is assessed on the disclosures related to their relations with community, and workforce, especially with reference to diversity, wage, health and safety issues. We also have a firm belief that good governance is the key to a sustainable organisation, and therefore, we evaluate the board composition, accounting and audit quality and disclosures, anti-corruption policies etc. to assess their governance practices. Though overall ESG integration is the “best in class approach”, we also apply an exclusion methodology for certain specific funds. The framework is still evolving, and we endeavour to ensure robustness of our ESG assessment.
External Agency rating on ESG performance: We have partnered with both domestic and international service providers that rate companies on the basis of their ESG risk profiles and management initiatives. Risk profiles are determined on the basis of their business and geographic locations. The rating takes into account all environmental, social and governance issues material to the company. This provides us in depth data to assess a company’s performance year-on-year and across its sectoral peer groups.