Mutual fund veteran Ajit Dayal, former Tata brand custodian Mukund Rajan and at least three other former Tata Group executives floated a $1-billion private equity fund along with Quantum Advisors mutual fund on Monday, designed to invest solely in publicly listed companies that promote environment, social and governance (ESG) values.
Rajan and Dayal are joined by former Tata Capital chief operating officer Govind Sankaranarayanan, former Tata Sons director Alan Rosling, former Tata Group chief of sustainability Shankar Venkateswaran, and Harish H.V., former partner at Grant Thornton.
The fund will work with companies willing to recognise the long-term advantages of actively adopting ESG standards of excellence, Rajan, also the chairman of the joint venture, said over the phone.
Dayal will lead the investment team of the fund, which will seek to drive greater ESG performance in Indian companies, mostly mid-cap firms.
“Nobody has looked at it beyond the usual suspects—the large companies. We will focus on companies who are not tracked well. Very soon, we will announce an advisory board comprising overseas experts and people from academia. We want to develop a coherent way of scoring and rating companies," Rajan said.
“We want to bring in private equity engagement—work with the promoters, board and management and help them tell their story better... A combination of all this will make a huge difference," he said.
Investing on the basis of ESG criteria has gained momentum worldwide, with more than $20 trillion assets under management, or around a quarter of all professionally managed assets around the world, according to a McKinsey & Co. report. In India, ESG funds are yet to make a mark, though the country’s position as the world’s second-most populous country and the third-largest greenhouse gas emitter makes a compelling case for them. Also, the Insolvency and Bankruptcy Code has bared governance standards at many Indian companies, something the Rajan-led fund wants to put at the forefront.
Besides, the European Commission has proposed to amend regulations so as to integrate ESG considerations and preferences into investment advice and portfolio management.
This is aimed at transforming Europe’s economy into a greener, more resilient and circular system by taking into account gas emissions, resource depletion, or working conditions.
“This should ensure that all financial entities that receive a mandate from their clients or beneficiaries to take investment decisions on their behalf would integrate ESG into their internal processes and inform their clients about it," the European Commission said in its draft proposals released earlier this year. Such requirements would apply, for example, to asset managers, insurance companies, pension funds, or investment advisors, it said.
With the changes coming up, Rajan expects more such funds to make inroads into Indian markets and wants his fund to start investing from the second half of 2019, after the general election.
“There will be many firms who will follow suit... (But) we are looking at investments worth $30-50 million ticket sizes that could get us 10% shareholding in the company," he said.
“We could be looking be at 30 investments in the first round itself. In the first four years, we are looking to redeploy the capital in other companies," he said.