AIIB’s newly wrapped ESG investments: Asia ESG Enhanced Credit Managed Portfolio Project

After fifty investments being approved and many more in pipeline, along with much criticism against India’s Infrastructure Fund [IIF], National Infrastructure Investment Fund [NIIF], IFC Emerging Asia Fund and Asia Investment Fund, two months ago a new partnership has been announced by Asian Infrastructure Investment Bank [AIIB] with UK’s Aberdeen Standard Investments [ASI] for AIIB’s Asia ESG Enhanced Credit Managed Portfolio Project.

As part of their initiative ‘Sustainable Capital Market’, under which this portfolio is categorised, AIIB intends to promote investments in corporate, green and quasi-sovereign bonds in infrastructure related sectors in Asia. Announced to boost ESG investment and with the target of returns at a rate of 5-7%, these bonds would be screened, assessed and managed on ESG principles laid down by the AIIB’s Environmental and Social Framework and managed by ASI who is globally the leading asset manager in ESG investments. ESG score, according to AIIB and ASI, would be created using information provided by corporates and third party rating providers.

According to AIIB, it will evaluate among other factors, a firm’s trajectory and its willingness to improve its ESG standards, once they benefit from this fund. Their framework is also designed for AIIB to engage when triggers such as firm’s reputational risks or strategy shifts happen and put the securities of these firms under watchlist. Meanwhile, ASI believes that conditions are “ripe” globally for investments in Asia over the next five to ten years, since “influential asset owners” have already started making the transition to ESG investments. AIIB also intends to invite other financial actors like insurance firms, pension funds and sovereign wealth funds to invest in this portfolio once it is established.

What are ESG Funds?

Funds which claim to have environment social and governance aspects reinforcing all their investment activities are broadly called ESG investments or funds. Originally launched by the mutual funds industry, ESG funds have sustainability as the generally underlying theme. Under SEBI’s guidelines, these funds come under thematic funds and focuses on non-financial actors like environment, climate, impact investing, best practices, resource efficiency, employment, supply chain issues, governance etc. to try to manage a firm’s strengths and weaknesses. In short, these funds invest in stocks of companies that has no reported violations of environment damage and social risks. An elaborate list would be – water, waste, plastics, circular economy, biodiversity, deforestation, toxic emissions, pollution, clean energy, carbon footprinting, decarbonisation, transition economy, energy efficiency, working conditions, health & safety, equal opportunities, staff retention, training & development, labour relations, talent retention, collective bargaining, modern slavery, child labour, supply chain issues, inequality, lack of access to resources, land rights, food & nutrition, data privacy, community relations, anti-bribery & corruption, audit issues, board balance, board diversity, remuneration, business ethics, director independence, shareholder rights, accountability, cyber security and tax.

There are also ESG assessment reports published annually by Principles for Responsible Investment [PRI], which is a voluntary self-regulation platform formed in 2006 by corporate and financial actors. PRI is endorsed by UNEP Finance Initiative and UN Global Impact. According to their website, “the six principles for responsible investment are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice.” Reporting is done through the assessment reports based on self-defined criteria and indices as part of ongoing learning and development. The report also documents ESG indicators covering asset classes like farmland, forestry, infrastructure, equity funds, hedge funds etc. The irony is these principles were created by the investors themselves and more than 2000 companies have signed, including the top ten leading global investment companies. There has been attempts to integrate ESG investments in real estate industry as well, since ever increasing rampant infrastructure projects directly involve capital, labour and especially land intensive activities. In India, Kotak Mahindra Asset Management Co. Ltd was the first asset management company to sign PRI in April 2018.

India’s first ESG fund was launched early this year by Avendus Capital Public Market Alternate Strategies. Avendus Capital, which already manages India’s largest hedge fund, seeks to raise USD 1 billion through international and national market for their Avendus India ESG fund to invest in listed equity companies. Among the members of their advisory panel is former Deputy Governor of RBI, Dr. Rakesh Mohan.

SBI Mutual Fund renamed its SBI Magnum Equity Fund to SBI Magnum Equity ESG fund which became first ESG Mutual fund of India. Three months ago, Quantum Mutual Fund launched India’s first ESG Equity fund, Quantum India ESG Equity Fund. National Stock Exchange has also introduced NIFTY 100 ESG and NIFTY 100 Enhanced ESG indices, and Bombay Stock Exchange has S&P BSE ESG index, as thematic indices.

Yet another evasive investment of AIIB

With its founding principle of being a clean, green and lean multilateral development bank, AIIB has always been under the scathing review of civil society and peoples’ groups for non-compliance to its own policies and for the aggressive pace of investments which they package in different ornamentations such as their founding principles and as a friendly bank from the global south.

While it is seemingly appreciable that firms are made to adhere to such standards in this particular ESG credit portfolio, the larger picture is strikingly clear – funds and investments are now packaged under the semblance of ESG to make it more attractive and investible for private players. We have been stunned earlier by observing multilateral development banks recklessly aiding the wealth extraction of private players through many such funds, policy influences and reputational privileges in the name of development projects globally. We have seen them sans any accountability also with huge funds channelled through financial intermediaries which does not require disclosures yet.

AIIB’s recent investments in India were approved last month which focus on financing renewable energy, power transmission & distribution and water infrastructure construction projects in India – the Tata Cleantech Sustainable Infrastructure On-Lending Facility with financing plan of USD 75 million and the L&T Green Infrastructure On-Lending Facility with USD 100 million. Both claim to increase the supply of renewable energy through mobilizing private capital investments in order to align Government of India’s plan to reduce carbon intensity under the Paris agreement. Objections have been raised and it is known that AIIB’s ESF policy itself is under review. It is nonsensical that they continue expanding, not just with 100 member countries but with investments already loaned out to the tune of USD 9.64 billion in a span of four years, while in the process of getting their policies and directives in place! And talk about not having a robust ESF system in place, while the larger and older MDBs like World Bank and IFC continue conducting periodic reviews of their robust policies!

And here we are, repeatedly manipulated with the branding and wrapping these funds are allowed to come in to our country, now robed with ‘ESG’. This is just another contriving moment for AIIB with the initial USD 500 million tied to the bandwagon, beginning to exploit this new ‘investible’ ‘green’ opportunity.

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