What is ESG Investing?

ESG is an acronym that stands for Environmental and Social Governance. It measures how companies interact with their stakeholders (and society as a whole) as part of their business processes. ESG goes beyond socially responsible business. It also focuses on sustainable business practices. ESG analysis can be used by investors to determine the long-term sustainability and potential risks of a business.

An organisation can maintain its reputation and credibility by having a healthy ESG policy. Because they include sustainability as a core value, they are less likely to be at risk. This ensures a steady, long-lasting business performance over the years. Organisations with weak ESG run the risk of instability, high risks, and greater potential for unexpected losses over the long-term. ESG is responsible for 25% of all professionally managed assets worldwide.

The environment is a company's ability to disclose its environmental information, make an environmental impact and reduce carbon emissions. Social refers specifically to the workplace's attitude towards diversity, human rights, and management. This includes all relationships with the community, such as philanthropy or corporate citizenship. Governance, on the other hand, accounts for shareholder rights and compensation as well as the relationship between shareholders and management.

ESG investment in India has also increased significantly over the past few years due to improved policy reforms and awareness.

ESG investing history

ESG investing was first developed in the 1960s by socially responsible investors (SRIs). Investors were looking for a more ethical way to do business at the time. Based on their involvement with business activities such as tobacco production, or support for the South African Apartheid regime, they began to exclude stocks and entire industries from their portfolios.

ESG investment growth

Ethical considerations, alignment with values and ethical considerations are still common motives for ESG investors. This field is constantly evolving and growing. Asset owners that are sensitive to climate change will find solutions on the market. These solutions have always focused on mitigation. They seek to minimize the impact of climate change on their portfolios by increasing exposure to renewable energy companies and decreasing exposure to greenhouse gases. Investors now expect companies to reveal how they adapt their business strategies to climate change in light of increasing awareness about climate change and its effect on human life.

ESG factors are often considered by investors as an additional tool in their investment process. ESG data is collected by investment firms to help them make decisions about the stock's value and risk. Investors view ESG as a measure of value and will therefore measure ESG performance within the companies in the same way that they measure traditional financial performance. This has led to detailed ESG reporting that includes factors like climate change, carbon intensity and controversy exposure.

ESG used to be a niche service only for institutional clients at one point. But it is now mainstream. ESG is now available across multiple asset classes and caters to a wide range of investors. ESG offers an opportunity for organisations to create long-term value, foster innovation, and respond to changing customer preferences.

ESG India

In India, ESG has been more prominent in the last ten years thanks to a series of policy reforms. The Reserve Bank of India (RBI), issued a 2007 letter to all scheduled commercial bank customers, informing them about their role in Corporate Social Responsibility, sustainable development, and non-financial reporting. CRISIL, Standard & Poor and KLD Research & Analytics created the S&P ESG India Index in 2008. This index is the first to be investable and identifies companies whose strategies and performances demonstrate a commitment to ESG standards.

The Ministry of Corporate Affairs (MCA), published guidelines for Corporate Social Responsibility (CSR). It advised businesses to develop a CSR strategy that focuses on six key elements: care for stakeholders; proper functioning; respect for workers' rights, welfare; respect for the environment; and activities for inclusive and social development. The Department of Public Enterprises (DPE), in 2010, issued CSR guidelines to Central Public Sector Enterprises. These guidelines required that Public Sector Enterprises have a CSR plan approved by their respective boards of directors.

MCA released the 2011 National Voluntary Guidelines (NVGs), which outline business' social, economic and environmental responsibilities. These guidelines were intended to be used in India by all businesses. The nine principles would be reported on in a Business Responsibility Report (BRR).

In 2012, the Securities and Exchange Board of India issued an order requiring 100 of India's largest listed companies to publish an annual report about business responsibility. This requirement was extended to 500 companies listed in SEBI's Listing Obligations Regulations 2015. Bombay Stock Exchange (BSE), launched Greenex, and Carbonex.

The MSCI India ESG Leaders Index launched in 2013. A landmark CSR law was passed in 2014. It required companies with particular profitability and scale to spend 2 percent of their average profits from previous years. 2015 saw the inclusion of social infrastructure and renewable energies in Priority Sector Lending requirements by RBI.

SEBI's green bond guidelines were published in 2016. India is now the second country to publish such guidelines after China. The National Voluntary Guidelines For Responsible Financing were published by the Indian Bank's Association to provide a standardised and systematic framework for action that addresses all aspects of banking's risk, opportunities, and responsibilities.

The Kotak Committee for corporate governance was established in 2017. The 2018 Guidance Document on ESG Disclosures was published by Bombay Stock Exchange (BSE). It provided a complete set of voluntary ESG disclosure recommendations that were guided by global sustainability reporting frameworks. It outlines the importance of ESG disclosures for investors and provides 33 specific issues or metrics that companies should be focusing on. Nifty 100 ESG Index was created.

MCA also revised NVCs to National Guidelines on Responsive Business Conduct (NGRBC), to align with the SDGs as well as the Respect pillar of United Nations Guiding Principles. MCA is currently developing India's National Action Plan on Business & Human Rights in consultation with various Ministries. This plan will be completed by 2020. MCA has uploaded a zero draft.

ESG investing in India was developed based on these guidelines. This has led to improved corporate behavior and transparency.

ESG investing in India

There are many factors that have contributed to India's rapid growth in ESG investments:

The move to a greener economy:In 2015, India submitted its Nationally Determined Contributions under the Paris Agreement for the period 2021-2030. The investment is estimated at USD 2.5 trillion between 2015- 2030. India is also determined to achieve the Sustainable Development Goals, (SDGs), to continue its mission of development and non-destructive change.

Making it a global plan:Businesses are becoming more proactive due to factors like corporate governance, business ethics, and business risks. ESG investing is now more widely known by companies. Global ESG funds also invest in India, as an aside. Global Sustainable Investment Alliance (GSIA) reports that 41 global E&S funds have invested an average of 25 percent in India equities. India could see more ESG investment in the future.

Gradual investment from domestic investors: Increasingly, domestic investors like SBI, Quantum and Kotak Mahindra have taken a major role in ESG investing. They are becoming more open to sustainable investments. Asset management companies have signed up to UN-supported principles of responsible investment. In India, there have been a number of ESG funds over the past few years. Avendus India launched its first ESG-based fund in 2019 Quantum Asset Management launched India's first ESG-based fund in 2019. Quantum launched this fund to gain long-term capital appreciation through investing in companies that meet Quantum’s ESG criteria.

India is witnessing an increase in reform measures.India is seeing a series of reforms to encourage investments in emerging sectors like renewable energy. There are also several voluntary and obligatory guidelines to ensure ethical corporate behavior and reporting on ESG factors.

Sustainability Indices in India: In recent years, quite some indices have been created to track, motor, and measure ESG performance. These include S&P BSE Greenex and S&P BSE Carbonex. They also track the NIFTY 100 ESG Index and NIFTY 100 enhanced ESG Index.

These developments and measures have seen an increase in ESG investing in India as well as around the globe. In 2019, net flows to sustainable funds in the US reached $20.6 billion, more than four times that of 2018. India's Socially Responsible Investment (SRI), asset base is USD 28 billion. This represents 0.1 percent of global SRI assets. This growth is mainly driven by domestic asset managers.

ESG Investments in India Challenges

ESG investment in India faces specific challenges

InaccurateData:An analyst, fund manager, or investor usually obtains information about a company’s governance, environmental, or social performance. This data can also be obtained from other sources, such as the annual sustainability report of an organization, media reports, and information that is available via public sources like news articles. This can often lead to a tedious, complex and inaccurate process. ESG investments in India continue to face challenges due to data reliability, accuracy, and credibility.

There is no market standardization in ESG investing names You can call it impact investing, sustainable and responsible investment, socially responsible investing or impact investing. It is difficult to standardize ESG data collection, impact measurement standards, and reporting methodology. Investors are also faced with additional complexity due to this.

Conventional mentality: Many investors and asset managers view ESG as an additional expense that could be eliminated. This vision is a major obstacle to ESG investment in India.

Inadequate track record for ESG funds:The majority of ESG funds were created in the past two years. India doesn't have an extensive track record in ESG-aligned funds, which means that it is not as attractive for investment.

Insufficient advocacy: Although ESG investing is slowly becoming more popular among companies, there is still not enough awareness about the issue, particularly in India. It is crucial to educate investors about the benefits of ESG investment.

Way forward

ESG is a concept that applies to all businesses. Companies are realising the importance of ESG. ESG investing has become a necessity with more investors, shareholders and employees demanding greater transparency. ESG investing, especially in this new normal, will undoubtedly play an even greater role in changing the way businesses in India and around the globe. This would ultimately benefit the business community as well as everyone else.