In a survey conducted by Franklin Templeton (in April 2021)on LinkedIn to understand the significance of Environmental Social and Governance (ESG) factors for an investor.
The majority of the people (66%) view ESG as an important criterion for making investments.
The sample size might be small and we are also not sure if the category of people who voted were real investors or not. As it was open to the public at large, we also do not know the nationality of the people.
But, one thing which emerges out of this survey of about 3000 people is the acknowledgment of Environmental Social and Governance (ESG) factors as criteria for investing.
There is a growing interest among investors to look at sustainable investing, making it hard for fund managers to overlook the ESG factors.
What is ESG?
Environmental, social, and governance (ESG) criteria are a set of standards for a company’s business operations that an aware investor uses to screen potential investments. There are various factors that constitute ESG.
Environmental (E) factors encompass an organization’s carbon footprint policies, water consumption, waste recycling, utilization of renewable resources, among other things. Social (S) factors include companies’ attitudes towards their employees, privacy, and data standards among others. Governance (G) factors consider the company’s board composition, audit practices, tax transparency as well as 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, Aditya Birla, among others.
The number of ESG funds is constantly rising primarily because ESG investing has become an integral part of asset management. Investors are increasingly becoming interested in environmental, social, and governance (ESG) issues.
However, the interest is not giving them complete visibility on where their money is going. When we spoke to a few Indian investors who invest in an ESG fund, there is a big assumption that their money is going into a bunch of clean power producers, electric vehicle companies, and lithium-ion battery makers.
The ESG funds invest in stocks and bonds of firms that are not only focused on environmental aspects, but also consider social, and governance parameters. Hence it is not necessary that only stocks related to green business will make it to the investment portfolio.
Moreover, there are various other challenges with ESG investing in India.
Challenges with ESG Investing in India
As per SEBI regulation, 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 as well, unlike a few western countries, ESG funds in India don’t have many cleantech, Electric Vehicles, and climate tech stocks to build their portfolio.
Adding to the complexity are the many listed companies that have both ESG and non-ESG components. A case in point is Reliance, even though the listed Reliance stock is heavily dependent on its petrochemical business for its revenue, in the last few years it has made a significant foray into renewables and clean energy business. In June 2021, Reliance announced an investment of over $10 billion (Rs 75,000 crores) over the next 3 years for its green business. Till the time, 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 considering tobacco is their primary source of revenue which impacts social health, the stock is against ESG principles.
Finally, the challenge with respect to 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 be always 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 really conform to the overall ESG theme but are still part of almost all ESG funds in India.
Why ESG is important 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 Coco-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 the states of Assam and West Bengal, tea production went down by more than 10%. Similarly, mangoes were impacted in Mysore, apples were destroyed in Kashmir due to the impact of climate change.
Though the impact of climate change transcends boundaries. India, by the virtue of its massive coastlines and a huge population, faces some of the biggest climates risks in the world.
From heat waves to flooding to air pollution, India is facing the wrath of the climate crisis quite frequently in the last few years. Climate change is severely threatening the country’s agricultural productivity, creating water shortage, and impacting the health & well-being of not only the human population but also the entire biodiversity.
Therefore it is important that the entire ecosystem – industries, government, academia, and individuals come together and make a conscious effort to mitigate climate risks.
At the Glasgow climate summit, India committed to achieving its net-zero targets by 2070 and reducing its 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 a growth that will ensure prosperity for many future generations.
Here is a look at a few Indian companies that have made climate commitments