Rising interest in ESG Investments in India

Aug 2, 2022

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What is ESG Investments?

ESG Investing – variously known as, socially responsible investing, impact investing and sustainable investing – is a form of investment where the priority is the Environmental (E), Social (S), and Governance (G) performance of a company as opposed to traditional investment where financial performance is the be-all and end-all.

This isn’t to say that financial returns are not important. However, multiple reasons such as a growing awareness of the effects of climate change, socially responsible business practices, and the need for efficient governance for long-term value generation have led investors to look beyond mere financial remuneration. Indeed, there is growing evidence that well-researched and structured ESG investments may provide higher returns than traditional investments.

As per KPMG International, sustainable investing is “a financial undertaking that aims to generate specific and measurable beneficial social or environmental effects, in addition to financial gain”. For further information on relevant terminologies of ESG Investments, check our blog here.

Global interest in ESG investing

Although ESG investments, as a concept, have been around for nearly 3 decades, it wasn’t until about 5 years ago that it was taken seriously. Until recently, there were doubts about whether ESG investments were just another marketing gimmick or a new growing vehicle of investments. On that note, let’s take a look at some data.

As of March 2022, 10% of assets invested in funds globally are in ESG funds with investors pouring in a record $ 649 billion in 2021. This has shown a growing trend as 2020 and 2019 saw nearly $ 542 billion and $ 285 billion, respectively.

Dispelling any notion of ESG investments being merely a passing trend, as per Bloomberg, global ESG assets are expected to exceed $ 53 trillion by 2025, amounting to more than one-third of the total projected $ 140.5 trillion in assets under management (AUM).

Nowadays and looking forward, ESG investments are and will be driven primarily by the US, Europe, and China. Indeed, investors globally have widely recognized ESG investments as the ‘Third Wave of Asset Management’ after Benjamin Graham’s concept of ‘Value Investing’ and Harry Markowitz’s ‘Modern Portfolio Theory’. However, this trend of assessing the impact of investments on the environment and society is going global, with Japan expected to be a major player.

ESG investments in India

In India, rising awareness among the urban population and investors has resulted in a change in perceptions and brought an urgency to ensure that the values of companies are aligned with those of the investors.

Formal ESG reporting by companies has been voluntary since 2009, with the help of guidelines provided by the Ministry of Corporate Affairs (MCA), which were updated in 2011 and 2019. However, this has changed to include 9 principles focused on transparency, sustainability, and accountability. It is safe to say that ESG reporting and investments have increased over the last 2 to 3 years in India with the change in investors' mindset attributed to recent climate change disasters and the economic and social upheaval caused by COVID-19.

This has resulted in change within the industry and the Securities and Exchange Board of India (SEBI) has made it mandatory for the Top 1000 listed companies to disclose ESG metrics from 2022-2023 as a part of Business Responsibility and Sustainability Reporting (BRSR).

Although ESG investing is still nascent in the country, the Indian investment management industry has launched 9 ESG funds in recent years. Some of the popular ESG funds in India include:

• Aditya Birla Sun Life ESG Fund
• Axis ESG Fund
• ICICI Prudential ESG Fund
• Kotak ESG Opportunities Fund
• Mirae Asset ESG Sector leaders ETF (Exchange-traded funds)
• Quantum India ESG Equity Fund
• SBI Magnum Equity ESG Fund

Increased Indian ESG investments and their impacts

Although this could be similar to the causality dilemma “which came first, the chicken or the egg?”, one could logically argue that the impact of increased awareness among investors about the environment, society, and governance structures of companies has led to higher interest in ESG investments which have, in turn, led to a higher degree of transparent ESG reporting and the growing need for more accurate data.

While still very much in its infancy, ESG reporting has steadily grown as a crucial part of a corporate’s annual reporting schedule. There are multiple reasons for this but the most important factor is that companies that are ESG compliant get easier access to capital from the market.

This impact can be seen even more prominently in upcoming IPOs in the Indian market such as Fabindia. Fabindia is an Indian company that sells ethnic products handmade by craftsmen and women from rural areas of India. The Company has plans to launch its IPO soon and has hired a top firm to audit its ESG compliance with the aim of being the first Indian IPO to be totally and voluntarily ESG compliant. If successful, this would allow the company to qualify for ESG funds, especially from Foreign Institutional Investors (FIIs).

Becoming ESG compliant and periodically reporting on metrics in a transparent manner helps increase the chances of getting capital and reduce financial risk for investors. Larger numbers of companies in India are looking to publish ESG reports or include their ESG performance as a part of their annual reports.

Reporting ESG metrics, whether via annual or integrated reports or as a separate ESG/sustainability report, requires organizations to be integrated with their thinking, assess their businesses and their impacts on the environment and society, and then take active measures to reduce that impact. Further, these companies would need to be proactive in collecting data and being able to present that information via their reports in a manner that enhances readability and appeals to potential investors and current stakeholders.

To achieve a visually appealing report with transparent and concise content requires a certain level of expertise, which has led many from India Inc. to approach specialized business report design agencies that can act as consultants to ensure their assessments are objective, conceptualize their report, create the content along with visually-stunning designs to give the reader an accessible and clear report that will help potential investors with their investment decision-making process.

One such design agency is Report Yak which has expert content and design teams that can guide companies through their report-creating process and produce the results they want. Feel free to check out our work here or get in touch with us to discuss your next report!