ESG in India’s Investment Landscape

Jan 9, 2023

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In the current geopolitical situation, India is rightly being viewed as a shining light in a world otherwise witnessing economic headwinds due to a stunted post-covid recovery, conflict in Europe, and high inflation.

This has led to most experts predicting the strong likelihood of recession amongst the 3 most significant markets in the world – the U.S.A., China, and Europe. All of this has not gone unnoticed by the Government of India, which combined with recent reforms, has looked to showcase the country as the ideal alternative the world can look to for stability, growth, and value.

Investing in India

The world economic outlook is not the only reason for rising investments in India. While it may act as a catalyst, India has seen a substantial recovery in 2021, when compared to the Covid-affected 2020 and this trend has continued in 2022.

In 2021, private equity and venture capital investments in India reached approximately USD 70 billion. This frenzy in activity in the markets was despite the year seeing a second wave of Covid and lockdowns. As a point of note, 2021 saw Indian investments grow faster than many major economies, including China, with a 96% growth over the previous year.

As mentioned earlier, there are a few reasons for this that when seen together gave rise to opportunities within the country for investments and value generations. China was dealing with political uncertainties and COVID, which was the catalyst to India gaining a higher share of the APAC market. Additionally, GoI had been bringing reforms in addition to a strong focus on infrastructure, clean energy, food security, etc.

India had set records in 2021 including in velocity of deals, exit momentum, increase in venture capital and growth equity, expansion in buyouts, and listing of new-age businesses. However, it is crucial to note that large investments from world-renowned firms such as Carlyle and Blackstone bring with them trendsetting traits or characteristics that have influenced the market for the better.

ESG – Trendsetter

Nowadays, committing to sustainability is a must-have for any organization to future-proof itself and ensure short, medium, and long-term value generation. That is, organizations need to become inherently resilient, and enhance stakeholder support and buy-in and this would be impossible to achieve without robust ESG frameworks that include a strong corporate governance structure, sustainable procurement processes, diversity & inclusion, and careful capital (finance, natural, social, human, manufacturing and intellectual) utilization.

To link back to the ‘India story’, the large influx of investments from massive funds like Carlyle, Blackstone, and others has led to a growing need for stronger ESG frameworks, disclosure of ESG data, etc. These funds giving ever greater priority to sustainable investments and the inclusion of ESG criteria in their investment decision-making processes – have forced companies to go beyond ‘greenwashing’ and take concrete, data-backed, steps to improve their ESG performance. This has been reflected in recent years with respect to sustainable investments in India, which has seen a dramatic increase in ESG funds. The last four years have seen Assets under Management (AUM) of ESG funds in India rise exponentially from nearly USD 283.5 million in March 2019 to USD 1.5 billion in March 2022.

This ‘trend’ is set to continue. Management consulting firm – Bain & Co.’s – Jenny Davis-Peccoud (founder and co-leader, Global Sustainability & Responsibility Practice) had recently said that over the next 5 years, ESG considerations are expected to influence 90% of India-bound investments. That is a huge jump from 5 years ago when only 40% of investments were taking ESG considerations into account before making investments.

Ms. Davis-Peccoud goes on to say in the interview – ‘There is a lot of capital flow into some of those sustainable areas. In India, the area that is getting the greatest capital flow is renewable.”

Her words ring ever so true considering the recent major announcement that Norway’s Climate Investment Fund, managed by Norfund, together with KLP, Norway’s largest pension company, made a first investment of INR 900 million in a transmission project in the state of Karnataka that is being developed by ReNew Power (one of the largest renewable energy independent power producers in India). This is expected to be just the first of further investments from the Norwegian fund in India’s renewable sector.

The above example isn’t to say that the renewable sector is the only one where ESG factors are crucial in the investment decision-making process of fund managers. Indeed, other sectors such as IT/ITES and consumer technology companies are also major benefactors, and most organizations in these and other sectors have seen the benefits of improving their ESG performance, disclosures, and reporting methodologies.

Government’s Influence on ESG

While the private industry is key in pushing ESG compliance and frameworks within the country, the Government of India has taken the lead and laid the path for this dramatic shift in India. There are already well-established standalone laws such as the Environment (Protection) Act, Minimum Wages Act and the Companies Act to boost Environmental, Social, and Governance norms within both the private and public sectors.

Most will also be aware of the mandated Business Responsibility and Sustainability Reporting (BRSR) section within annual reports of the top 1000 (by market cap) listed companies. This mandate is from the Securities and Exchange Board of India (SEBI) and begins in FY 2023. However, it is pertinent to note that this still only represents less than 0.1% of the over 1.43 million registered companies in India. In other words, the scope for growth in ESG compliance within companies of the country is huge, thereby suggesting that this trend will keep going for years.

Besides regulations, frameworks, and standards, the Government of India has also committed to achieving net zero emissions by 2070 in addition to other announcements made during the recent COP conferences. For example, as a part of the Paris Agreement – a total of 196 countries, including India, have agreed to work together to reduce greenhouse gas (GHG) emissions.

Conclusion

The Indian investment ecosystem will continue to evolve, as far as ESG factors are considered, and is already beginning to move to the next phase – that of investment funds shifting from a risk mitigation view of ESG to one of value-creation. The large, renowned funds will lay the path forward for others to follow with respect to meeting net zero and responsible investment goals.

All of this has led companies to find ways to integrate ESG into all aspects of their business. However, just as important is for them to ensure transparent and clear ESG disclosures that tell a true and fair story of the organization’s ESG journey. There are multiple channels of communication that companies use to get their message across to stakeholders, investors, and shareholders – but arguably the most crucial one (vis-à-vis investments) is corporate reports.

Corporate reports such as annual reports, integrated reports, ESG reports, Sustainability reports, Impact reports, etc. are now a regular part of the corporate communication calendar in India. To achieve high readability, easy accessibility, and interactive, visual, and expertly created corporate reports – companies turn to specialized corporate reporting agencies.

Report Yak is one such agency that has the experience and expertise to conceptualize and create your corporate reports from a design and content point of view so that you can get your company’s story across to potential investors. Feel free to check out some of our award-winning reports here and we look forward to speaking with you about your next report!