• In 2022, the iShares MSCI India ETF was enhanced to address climate risk and began tracking the MSCI India ESG Enhanced Focus CTB Select Index in December, rebranding as the iShares MSCI India Climate Transition ETF. It is the first sustainable ETF to offer a diversified exposure to large and mid-sized companies with better Environmental, Social and Governance credentials in India. 
   
• As of July 23, 2023, the ETF has gained a 13.6% in USD terms for the year. AUM of the ETF recorded a year on year increase of 40% to US$91 million. Trading turnover has increased by 80% with S$82 million of ETF units shared traded on secondary market over the 12-month period. 
   
• Combined AUM of sustainability ETFs listed on SGX has crossed S$920M, signifying a shift in investor appetite towards climate investing. This is also the second SGX ETF - DR listing on Stock Exchange of Thailand after the recent debut of Gold ETF-DR.

The ETF Evolution 

Back in 2022, the iShares MSCI India ETF underwent significant enhancements to address climate risk in Indian equity investments. The ETF transitioned to tracking the MSCI India ESG Enhanced Focus CTB Select Index in December 2022, marking it as a Climate Transition Benchmark.

The ETF was renamed to iShares MSCI India Climate Transition ETF, distinguishing it as the first sustainable ETF to offer a diversified exposure to large and mid-sized companies with better Environmental, Social and Governance credentials in India, the fastest growing major economy.¹ 

Unit prices of the ETF has gained 13.6% in USD terms in the 2023 year to 23 July. This brings the five- year return of the ETF to 70.0%. The past 5 years has seen the ETF maintained firm but not significant correlation to the NSE Nifty 50 Index with the r-squared at 0.72. There are presently subtle differences between the two gauges such as Financials comprising one-third of the NSE Nifty Index weights, compared to one-quarter of the ETF AUM.

AUM of the ETF recorded a year on year increase of 40% to US$91 million. Trading turnover has increased by 80% with S$82M of ETF units shared traded on secondary market over the 12-month period.

The ETF is traded in both USD (Code: I98) and SGD (Code: QK9) counters. The ADT for the USD counter this year is in the vicinity of US$130,000, and for the SGD counter in the vicinity of S$150,000. With the Index making fresh all-time highs in July, at the time of writing, the minimum investment in the counters as of 23 July, is US$14.67 for 1 unit of I98 and S$19.68 for 1 unit of QK9.

On 24^th July, a Thai Depository Receipt (Code: INDIAESG19) has listed on the Stock Exchange of Thailand. One DR unit of INDIAESG19 provides the equivalent exposure of 1/100 unit of I98. Thus, with the prevailing 1 USD to 36.1 THB exchange rate, 1 DR unit of INDIAESG19 would be priced at (US$14.67/100) x 36 = THB 5.30. 

MSCI India ESG Enhanced Focus CTB Select Index

The ETF tracks the MSCI India ESG Enhanced Focus CTB Select Index. This index is structured to enhance exposure to positive ESG factors and aims to reduce carbon equivalent exposure to CO2 and other GHGs, as well as the exposure to potential emissions risk from fossil fuel reserves by 30%. It also strives to maintain risk and return characteristics like the MSCI India Index, which is its underlying market capitalisation weighted index.

The fund’s index exceeds the minimum standards of the EU Climate Transition Benchmarks (CTB) while maintaining risk-return profile similar to MSCI India. The ETF holds 115 companies² which play a key role in India’s economic and low carbon transformation. 

From a valuation perspective, as of the end of June the MSCI India ESG Enhanced Focus CTB Select Index maintained a P/E ratio of 27.8x and P/B of 4.2x. by comparison the MSCI India Index maintained a marginally lower P/E of 26.5x and same P/B ratio of 4.2x. The MSCI Emerging Markets Asia Index maintained a P/E of 17.7x and P/B of 1.8x. 

Acknowledging the election outcome while maintaining a commitment to fiscal prudence: Asia Decoded

The new July highs for India equities has coincided with optimistic anticipation to the first budget post-election of PM Modi's coalition government delivered on 23 July. According to Priyanka Kishore at Asia Decoded:

• PM Modi's coalition government's first budget post-election focuses on employment creation and rural spending, adjusting the FY25 expenditure mix within the fiscal consolidation framework.
• Populist schemes such as wage transfers, hiring incentives, and tax benefits are introduced, along with a new skilling program to encourage job creation.
• The budget increases allocations for coalition allies in Andhra Pradesh and Bihar, with a plan for the development of eastern states.
• Fiscal consolidation is a surprise upside, with the FY25 deficit target reduced to 4.9% of GDP, aided by a significant jump in the RBI’s dividend payout to the government.
• The medium-term outlook suggests a focus on labor market policies and rural development, with challenges in balancing expenditures with coalition demands and occasional populist handouts.

IMF raises India's growth outlook for FY24

The International Monetary Fund maintained in the mid-July World Economic Outlook Update that its growth forecast for India has been adjusted to a higher rate of 7.0% for this year. This revision was due to the positive carryover from the upward revisions in 2023, and the anticipated improvements in private consumption, especially in rural areas.

Reliance Industries: a diversified conglomerate with ongoing commitments to New Energy initiatives

As the biggest Index weight, Reliance Industries Limited comprised 9.4% of the MSCI India ESG Enhanced Focus CTB Select Index as of end June. Recognised as a Fortune Global 500 entity, over the past forty years, RIL has built a business that spans Retail, Digital Services, Media and Entertainment, Oil to Chemicals (O2C), Oil and Gas E&P and New Energy. The stock maintains a market value of US$240 billion. For FY24 (ended 31 Mar), Oil to Gas and Retail contributed the most to RIL’s revenue. RIL highlighted that the O2C segment's profitability was supported by strong global fuel demand and limited refining flexibility, while the downstream chemical industry faced challenging conditions. Despite these headwinds, the company maintained its leading positions and delivered a resilient performance through cost management and feedstock flexibility, with the KG-D6 block contributing significantly to India's domestic gas production and ongoing commitments to New Energy initiatives for sustainable growth. At the same time, the Group maintain that Reliance Retail is enhancing customer experiences through a robust omni-channel presence, offering unique product choices and superior in-store experiences, alongside digital commerce platforms that provide a wide brand catalogue. Additionally, the company is seeking to empower millions of merchants with innovative initiatives in the new commerce space.

Rising prominence of Indian equities and climate efforts

Indian equities are gaining prominence in global portfolios with increased MSCI EM Index weight, while India's climate efforts are pivotal globally. The iShares MSCI India Climate Transition ETF is a pioneering sustainable ETF focusing on decarbonization and issuers with strong ESG credentials.

India’s transition to a low-carbon economy represents a unique opportunity and it is expected that energy sector capex alone could grow from USD 100B in 2025 to USD 600B in 2050³.

More on the risks of ETFs can be found here

1. World Bank, Global Economic Prospects Jan.2024. 
2. Source: BlackRock Investment Institute, Aladdin Sustainabiltiy Analytics
3. Source: BlackRock as of Feb 14 2024.

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