India needs to get out of its ESG infancy…fast!

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India needs to get out of its ESG infancy…fast!
Free reusable grocery bags being used at a Whole Foods Market natural and organic foods stores ending the use of disposable plastic bags. Despite a renewed focus ESG is still in its infancy in India.Courtesy: Getty Images

Indian investors are latching on to the concept of investing only in companies that meet environmental, social and governance standards. This is in line with trends in Europe and the US and could lead to significant improvements in corporate governance across the board in India.

ESG investing is catching on in India – and companies will have to mandatorily inform stakeholders about their ESG-compliance from the next financial year.

This trend of adding an additional layer of scrutiny into a company’s functioning – of considering its environmental, social and governance (ESG) record, in addition to its financial performance – is quite popular in Europe and the US. Now, investors in Indian stocks are also following suit.

ESG investing trend still in its infancy in India

This trend is still in its infancy in India. During the 2020-21 financial year, investors poured in a little more than $500 million into Indian ESG mutual funds against $290 million the previous year, a massive jump of 76 per cent, albeit from a small base.

By comparison, the ESG investment in 2018 was estimated at more than $30 trillion, according to the Global Sustainable Investment Alliance, a coalition of membership-based sustainable investment organisations around the world. This figure could grow by as much as $20 trillion over the next couple of decades to $50 trillion. To put the figure in context, the entire S&P 500, which features the 500 largest companies listed in the US, was valued at $33.4 billion as on December 31, 2020.

In 2020-21, investors poured $500 million into Indian ESG MFs. By comparison, the ESG investment worldwide in 2018 was $30 trillion. This could grow by as much as $20 trillion over the two decades.

Being ESG-compliant is more profitable

Earlier, it was thought that millennial and Gen Z demands for greater transparency, more responsibility and higher levels of ecological accountability from company managements and fund managers would come at the expense of returns. But empirical evidence suggests that these strategies can beat the market and give higher returns compared to more traditional methods of running companies and investing in stocks.

The reason: Only the best-run companies make the cut.

Lower CO2 emissions to limit global warming and climate change. Cigarettes-to-hotels conglomerate ITC pioneered the concept of ESG in India almost two decades ago.
Lower CO2 emissions to limit global warming and climate change. Cigarettes-to-hotels conglomerate ITC pioneered the concept of ESG in India almost two decades ago.Courtesy: Getty Images

New Sebi norms mandate BRSR reports

Indian stock market regulator, the Securities and Exchange Board of India (Sebi) has recently issued a circular making it mandatory for the top 1,000 listed companies to file a new Business Responsibility and Sustainability Report (BRSR), which lists out their ESG risks and opportunities along with the financial implications of the same.

Incidentally, this approach was pioneered in India by cigarettes-to-hotels conglomerate ITC almost two decades ago. Its triple bottom line (TBL) approach is an accounting framework with three parts – Social, Environmental and Financial – that largely cover the ESG mandate.

This concept gained prominence in 1994 when entrepreneur-author John Elkington built upon the concept of TBL in the hope of transforming the financial accounting-focused business system to take on a more comprehensive approach to measuring impact and success.

It was thought that ESG demands from company managements would reduce returns. But empirical evidence suggests that these strategies give higher returns compared to other methods of investing.

Mandatory from next year

Under the new Sebi guidelines, companies may have to provide information on sustainability-related goals such as the use of water and energy, emissions of greenhouse gases, waste management practices and related disclosures from the next financial year.

Social disclosures relate to issues covering workers and stakeholders, the value chain and a companies’ customers. Under the new norms, the top 1,000 companies will have to clearly reveal the gender and social diversity of their workforce, attrition rates, welfare benefits to different classes of workers and several other hitherto unreported aspects of business.

There is a section on consumer protection in the new Sebi norms as well. Companies will have to provide transparent information on labelling, recall and complaints – on products, data privacy and cybersecurity.

Finance Minister Nirmala Sitharaman al,ong with MOS Finance Anurag Thakur, addresses the SEBI board. Under the new Sebi guidelines, companies may have to provide information on sustainability-related goals such as the use of water and energy, emissions of greenhouse gases, waste management practices and related disclosures from the next financial year.
Finance Minister Nirmala Sitharaman al,ong with MOS Finance Anurag Thakur, addresses the SEBI board. Under the new Sebi guidelines, companies may have to provide information on sustainability-related goals such as the use of water and energy, emissions of greenhouse gases, waste management practices and related disclosures from the next financial year. Courtesy: ANI

SBI MF, others investing in ESG-compliant companies

In India, the market leader among MFs in the ESG space is SBI Magnum Equity ESG, with assets under management of about $500 million. The fund delivered returns if 54 per cent in the previous fiscal. Other funds in this space include Axis Equity ESG, ICICI Prudential ESG, Kotak ESG Opportunities and Marae Mutual Fund.

Under new Sebi rules, companies may have to provide information on sustainability-related goals from the next financial year. The top 1,000 listed companies will have to reveal hitherto unreported aspects of business to the public.

This genre of funds has clearly come into its own in the recent times. Overall, as much as $152 billion flowed into these funds in the last quarter of last year, with 80 per cent of these inflows coming from Europe alone.

Corporate governance standards could improve

But as the trend gains momentum in the days ahead, investors in India can also be expected to jump on to the bandwagon. Given that most experts agree that this approach will improve returns going forward, it could be just a matter of time before more Indian investors start adopting the ESG approach to investing.

Over a period of time, this is expected to improve governance systems and environmental standards across the board, as companies that are not compliant with norms expected by investors could be starved of fresh funding opportunities. This could provide a significant push to improved corporate governance standards in India.

As mentioned above, this trend is still in its infancy in India. Those who can buy into this trend now, or over the next few quarters, could stand to make a fortune in the years ahead.

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