💎Unveiled: Google, ABG & ESG investing (27 February 2022)

Recently, there have been many instances, where uncovering the veil showed the real situation.

This week, we look at three such interesting stories where new actualities have been discovered- Google's search platform, ABG's bank fraud, and ESG sector investing.

A recent post by search-engine blogger DKB entitled "Google Search is Dying" claims that google as a search engine is losing the trust of the users due to the sponsored content.

Rather, players like Reddit, a social news aggregation, web content rating, and discussion website, are currently becoming a popular search engine.

Pay to play

‍Google ads help businesses to target their audience through different methods when they search for products or services. Definitely, a good way to build awareness and get visibility.

And it's not just businesses thriving on ads, there are atypical use cases too. Political parties use it a lot during elections. As per a report, in India, verified political advertisers spent Rs 74 crore on 22,000 Google ads from Feb'19 to Jan'22.

The pain points

‍- With the emergence of the SEO industry, many manipulate the search results and show their content at the top which might not be relevant for the user

- While search engines might be helpful for factual answers, but to seek actual descriptive opinions or reviews might become difficult if there are no strong communities

- Google promotes many of its platforms and services like Google maps, Youtube when a user searches for any related terms

Our take

‍Time for investors to keep a close eye as ads form 80% of google's business. Also, time to rethink for other players like Facebook who are building their platforms around the same model.

Great opportunities for emerging players like Reddit and Quora who are building up communities and winning the audience's trust by focusing on the relevance of content, user customization, privacy.

In the biggest bank fraud case in recent times, ABG Shipyard has been alleged of cheating 28 banks of Rs 22,842 crores between 2012 and 2017.

There is a rampant rise in bank frauds, posing threats to the stability of the financial system and weakening the credibility of banks, auditors, credit rating agencies, and the regulators like RBI. Worst of all, it is taking away the trust of depositors.‍

Digging deeper

‍Former RBI governor Urjit Patel stated that most of the frauds are related to loans and occur due to poor risk assessment and due diligence at banks.

A recent study found a correlation between rising frauds and NPAs, which indicates a lack of requisite standards of corporate governance, leading to more instances of loan defaults. This is suggestive of collusion between corporate entities and top bank officials.

The chronicle of mistakes

‍- Before 2008, most of ABG's orders were non-serious and from related parties (like Essar), but banks while sanctioning the loans, did not go deep into the details

- After 2008, when financial crises had already hit ABG's business, resulting in a pile of inventory and lack of new orders, banks still continued to give it loans

- Even though ABG was declared as an NPA in 2016, it took SBI almost three years to identify the fraud

Our take

‍The roots of ABG's fraud are in 2008's financial crises and lately, Covid too brought along survival challenges for many businesses. Hence it's required of the banks to adapt some global best practices and learn how to avoid such mistakes in the future.

Also, banks must evaluate projects on the basis of the business model and not get influenced by the brand name or the people associated. Strict punitive steps for bank employees who collude with fraudsters can help.

Lately, there have been a series of scandals, initiating regulatory probes into funds over misleading the clients about the ESG investing efforts. Last year, the big-name DWS fund in the USA faced one such allegation.

Many asset managers, who are under the pressure to follow the trend and get a pie of investors' money, have been launching new funds without much research. Some have rather been rebranding the conventional funds into sustainable offerings.
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More towards responsible investing

‍This comes at a time when retail investors are moving towards responsible investing to make a meaningful change in society.

Last quarter alone, investors globally poured USD 143 billion into ESG funds that took total worldwide sustainable assets to USD 2.7 trillion across more than 5,900 funds. The assets under management of ESG funds in India have risen 4.7x in two years and stood at Rs 12,300 crore in Jan'22.

What can be done better?

‍-Funds: disclosures on what percentage of the money in the fund will be allocated purely to ESG investing vs the other themes

-Companies: reporting of audited sustainability-related quantified metrics under different domains of environmental, social, and governance

-Regulator: defining clear terms, for eg., greenwashing and also redressal measures for the investors if found cheated by the funds or companies, as well as a quick resolution mechanism

Our take

‍While the ESG funds sector has rapidly increased in size in recent years, financial regulators have been slower to come up with monitoring mechanisms. That has created a “limbo period" where consumers are at risk of buying investment products that say they’re doing something they’re actually not doing.

Hence it is very important for the regulators to first have clear and detailed norms on any new investment products before they allow the funds to roll them out to the investors.

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In the tenth edition of Insider Investing, we talk about the Russian invasion of Ukraine, and its implications on the economy. Also, we share some recommendations on how to build a long term portfolio on the back of diversified asset allocation and quality to protect risk in such situations.

Hope common grounds get unearthed soon and we find a way to sustainable peace!

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