ESG Investments in India is complicated

In a survey by Franklin Templeton (in April 2021) to understand the significance of Environmental, Social, and Governance (ESG) factors for an investor, most people (66%) view ESG as an essential investment criterion.

The survey’s sample size might be small, and we are also unsure if the category of people who voted were real investors, as it was open to the public at large. We also did not know the nationality of the people.

Though, one thing which emerges from this survey of about 30000 people is the acknowledgment of more than 80 percent of people that Environmental, Social, and Governance (ESG) factors are an essential investment criterion.

Investors’ interest is growing in sustainable investing, making it hard for fund managers to overlook the ESG factors.

What is ESG?

Environmental, social, and governance (ESG) criteria are standards for a company’s business operations that an aware investor uses to screen potential investments.

Various factors constitute ESG.

Environmental (E) factors encompass an organization’s carbon footprint policies, water consumption, waste recycling, and utilization of renewable resources, among other things.
Social (S) factors include company attitudes toward employees, privacy, and data standards.
Governance (G) factors consider the company’s board composition, audit practices, tax transparency, and sensitivity to shareholders.

ESG funds in India

Till October 2020, there were just three ESG funds in India, and by February 2021, the figure became nine. All the big fund houses in India have launched their dedicated ESG funds – SBI, ICICI, Kotak, Axis, and Aditya Birla, among others.

The number of ESG funds is constantly rising primarily because ESG investing has become integral to asset management. Investors are also increasingly becoming environmentally and socially conscious.

However, the consciousness is not giving them comprehensive visibility on where their money is going. When we spoke to a few Indian investors who invest in an ESG fund, there was a big assumption that their money goes into clean energy producers, electric vehicle companies, waste management firms, and companies that adhere to ESG principles.

Many investors are also unaware that ESG funds invest in stocks and bonds of firms that not only focus on environmental aspects but also consider social and governance parameters. Hence not necessarily; only stocks related to green business make it to the investment portfolio.

In addition, there are various other challenges with ESG investing in India.

Challenges with ESG Investing in India

As per India’s regulatory body SEBI rule, at least 80% of their ESG fund allocation should comply with the ESG theme; the rest is left to the discretion of the fund and fund manager, where he/she apportions investors’ money.

Besides, it is not easy for fund managers; unlike a few Western countries, ESG funds in India don’t have many cleantech, electric vehicles, and climate tech stocks to build their portfolio. Therefore listed companies with ESG and non-ESG components add to the investment portfolio.

A case in point is Reliance; even though the listed Reliance stock heavily depends on its fossil-fuel business for its revenue, it has made a significant foray into the renewables and clean energy business in the last few years. In June 2021, Reliance announced an investment of over $10 billion (Rs 75,000 crores) for its green business over the next three years. So the Reliance stock is both climate-damaging but also trying to make things better. Until Reliance brings its green business onto the stock market, the fund managers & investors will have to deal with the conundrum.

Similar is the case with FMCG behemoth ITC; the company is into a range of diverse products, but tobacco is their primary source of revenue which impacts social health, and therefore, it is anti-ESG, but it ranks high on other parameters, making it the best Indian ESG stock.

Finally, the challenge concerns the authenticity of ESG data. Data providers and funds mostly rely on companies’ annual reports, investor calls, and media reports to evaluate their ESG credentials, which might not always be accurate for assessment.

Even though SEBI has mandated the top 1000 Indian listed companies to issue business responsibility and sustainability reports (BRSR) in line with international ESG frameworks like Global Reporting Initiative (GRI), there is a lack of transparency and scrutiny of the details.

These limitations of ESG funds in India lead to investors’ struggles to find reliable information and difficulty in comparing companies’ climate and ESG performance.

The stock of companies like Reliance, ITC, chemical companies, oil & gas companies, and many others do not conform to the overall ESG theme but are still part of almost all ESG funds in India.

Why ESG is essential in India

In 2014, the Coca-Cola bottling plant was summoned to close in the northern Indian state of Uttar Pradesh after local farmers blamed it for using too much water. This was the second instance when Coca-Cola was ordered to close its plant in India; earlier, it was done in the southern state of Kerala.

In 2020, due to heavy rain and flooding in Assam and West Bengal, tea production went down by more than 10%. Similarly, mangoes were impacted in Mysore, and apples were destroyed in Kashmir due to the impact of climate change.

Though the impact of climate change transcends boundaries, India, with its massive coastlines and huge population, faces some of the most significant climate risks in the world. From heat waves to flooding to air pollution, India has frequently faced the wrath of the climate crisis in the last few years. Climate change is severely threatening the country’s agricultural productivity, creating water shortages, and impacting the health & well-being of not only the human population but also the entire biodiversity.

Therefore the entire ecosystem – industries, government, academia, and individuals must come together and consciously try to mitigate climate risks.

At the Glasgow climate summit, India committed to achieving its net-zero targets by 2070 and reducing carbon intensity by 45 percent by 2030. This will entail the majority of the country’s investments going into decarbonizing its economy.

Amongst the various initiatives, investment in technologies such as renewable energy, electric vehicles, green hydrogen, battery storage, and carbon capture promise to be the biggest opportunities for ESG.

The greater flow of capital into the ESG funds will drive companies to follow better governance standards, environment-friendly measures, and ethical practices.

ESG investing has the potential to play a significant role in helping the Indian economy achieve its climate goals and growth that will ensure prosperity for many future generations.