Is India ready for ESG?

The Economic Times     28th November 2020     Save    

Context: India has huge upside potential as a major emerging market in Environment, Social and Governance(ESG) compliant assets.

Need for ESG aspects in India:

  • Huge emissions and Climate Vulnerability: India is the world’s third-largest emitter of greenhouse gases and is also extremely vulnerable to climate change.
  • Inequality and Hunger: India continues to face substantial challenges pertaining to inequality and hunger.
  • ESG factor in investment decision:  Currently, 7% of domestic Asset Under Management(AUM) is invested in ESG funds which are expected to grow to 30% in a decade.
  • Low investments:: Currently, 7% of domestic Asset Under Management(AUM) is invested in ESG funds which are expected to grow to 30% in a decade.
  • Huge potential worldwide:
    • Globally, ESG investments are expected to triple, and cross $100 trillion in the coming decade. That’s a huge commitment from investors.
    • Over 3,000 of them have signed the UN Principles for Responsible Investment,
    • 30% of global investments have already undergone ESG screening, and numbers could race past 90% by 2030.

Measures taken by the government to promote ESG compliant assets in India

  • Increased the extent of disclosures:
    • The Securities and Exchange Board of India’s (SEBI), has increased the extent of disclosures and has also standardized the areas of disclosures.
    • The enactment of the Companies Act 2013 requires companies to furnish non-financial information, mandatorily.
  • Pledged environmental targets: India has pledged a 33-35% reduction in the ‘emissions intensity’ of its economy by 2030, compared to 2005 levels.
    • India has also become the second country to issue guidelines on green bonds.

Benefits of ESG compliance:

  • Helps understand risk and opportunities: ESG assessment tools will play an important role in
    • Informing investors about their company’s sensitivities;
    • Preparation to cope with disruptive legislation aimed at social development;
    • Environment protection and corporate governance.
  • Generates higher value: Investment in ESG conscious companies generates higher value over the long term; Even lenders have started to view green practices favourably.
  • Businesses with better ESG proposition raise funds at favourable rates, and greater access to global capital also bolsters financial flexibility.
  • Acknowledges the interest of all stakeholders: Companies that are polluting and hazardous can perform well on ESG metrics and attract global capital if their corporate governance is strong.
  • Generational opportunity for capital-starved domestic business: By focusing on it and improving disclosure, companies can attract global green investments.

Conclusion: External opinion on ESG performance from credible agencies will help them make sustainable investment decisions.