International investors are smitten with India’s robust GDP growth and increasing weight within the MSCI Emerging Markets Index. As India gains prominence in broad-based market benchmarks, active portfolio managers may wish to gain deeper insights into the market’s characteristics and risks.
Recently, we explored the sector and revenue characteristics of the Indian equity market. In this blog post, we review how companies have approached the management of financially relevant sustainability risks and opportunities. Although just one aspect of sustainable investing, these attributes have impacted corporate valuations and risk-adjusted stock performance.
MSCI ESG Ratings profile of Indian equities has improved
An evaluation of MSCI ESG Ratings for constituents of the MSCI India Index revealed that 8% were categorized as leaders (up from 6% five years ago), while 26% were laggards (down from 34% five years ago),[1] as of the end of February 2024. Compared with the MSCI Emerging Markets Index, the MSCI India Index had a smaller share of constituents in both leader and laggard categories and a lower MSCI ESG score, 5.2 versus 5.7.[2]
MSCI India Index’s share of leaders and laggards lower than MSCI Emerging Markets Index’s shares
Share of laggard stocks in the MSCI India Index fell over the last five years
Indian equities scored higher in governance themes than broad EM equities
We also compared the constituents of the MSCI India and MSCI Emerging Markets Indexes on 10 MSCI ESG Ratings themes. Constituents of the MSCI India Index had higher scores on governance themes, such as corporate behavior and corporate governance. Results were mixed, however, on environmental and social themes: higher on climate change, pollution and waste, product liability, stakeholder opposition and social opportunities, and lower on environmental opportunities and human capital.
Indian equities posted mixed performance on environmental and social themes
MSCI ESG Leaders in India have room to improve relative to their EM counterparts
The MSCI India ESG Leaders Index represents the performance of companies with higher-than-average MSCI ESG Ratings than their sector peers. The MSCI India ESG Leaders Index has marginally outperformed the MSCI India Index by an annualized rate of 0.8%, with an annualized risk of one percentage point below the benchmark, for the nearly 10-year period from August 2013 through February 2024. But relative to the MSCI Emerging Markets ESG Leaders Index, the MSCI India ESG Leaders Index had a lower MSCI ESG score, higher carbon-emissions intensity and a lower proportion of companies with a GHG emissions-reduction target.
MSCI India ESG Leaders Index outperformed its parent and EM counterpart on a risk-adjusted basis
Sustainability is a growing focus for investors in Indian equities
Given India’s increasing weight in the MSCI Emerging Markets Index and its growing importance within global supply chains, investors may pay closer attention to the changing environmental, social and governance profile of its constituents in India. The profile has improved over the last five years, characterized by a decrease in the proportion of laggard constituents and an increase in the proportion with an average rating. Understanding this changing profile could offer valuable insights to investors in India’s equity market.