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Sustainable curiosity gives boost to ESG in India 

ESG in India, Solar Thermal Power Plant in India
Solar Thermal Power Plant in India

Environmental, social, and governance (ESG) practices are gradually gaining traction in India. Amid burgeoning demand for clean technologies, India has already set up a base for the green sector. Increased demand for the green goods market and major developments in clean energy technology has paved the way for business opportunities.

For Indian companies, it became crucial to incorporate ESG factors to remain competitive globally. Thus, an increasing number of Indian companies started to apply environmentally conscious business practices, strong social responsibility as well as a corporate governance framework.

Pressure of ESG disclosures in India

Even though the country lags on its ESG standards when compared globally, India’s reporting frameworks and requirements have evolved over the past two decades. Revisions to the Companies Act, stricter board norms, auditor accountability, and shareholder approval for key transactions, and enhanced disclosures have raised the bar on ESG parameters. India’s social disclosure levels have more than doubled from 2010 through 2017, dramatically outscoring the USA.

Overall, studies suggest that India’s ESG disclosures lag only marginally behind those of global peers. As per Edelweiss Finance’s 2019 analysis, IT, Cement, Engineering sectors had the highest ESG disclosure scores in India, out of the overall 11 large sectors analyzed. Not only that, but these three sectors also had higher ESG disclosure scores than their global counterparts. In Edelweiss ESG Scorecard & Ratings for India’s top 100 companies, the top 4 are all IT companies (HCL, TCS, Tech M, Wipro).

ESG integration rising

Some large firms have been ahead bringing in ESG-related strategies and initiatives. As per Edelweiss, the social quotient within ESG will gain greater prominence as a fall out of the pandemic. In India, however, the focus was more on governance and to a lesser extent on the environment and social factors. However, Indian corporates have been quick to announce significant initiatives towards their fight against the pandemic.

Harsha Upadhyaya, President & Chief Investment Officer – Equity, Kotak Mahindra Asset Management Company said, “The pandemic has led to a very fundamental much-needed shift in the Indian Corporate Social Responsibility activities. Covid-19 has rekindled focus on ESG by the mainstream, we have witnessed a lot of improvement in company culture on ESG as well as regulatory focus on making public reporting of these indicators more transparent.”

Biggest business groups like Mahindra, Reliance and Birla are leading the way as top corporates who have recently showcased their ESG quotient. These large conglomerates also have diversified into businesses that seek to fill the gap relevant to the Social and Governance aspects of ESG.

Spending over $123bn under Corporate Social Responsibility (CSR) last year, Reliance Industries Group (RIL) has been amongst the top companies to enhance its social quotient. The conglomerate was one of the first in India to announce comprehensive plans towards its fight against the coronavirus outbreak. RIL’s initiatives have helped to create huge goodwill not only with the government but also with its customers and investors.

Aditya Birla Group also has committed to a comprehensive roadmap to shape up sustainable businesses. It has set up a Group Sustainability Cell with the goal of achieving its ESG vision. Mahindra Group is committed to the Science Based Targets initiative (SBTi) to slash greenhouse gas (GHG) emissions. It has made CSR contributions in domains of education, agriculture, farmers, and youth. The Group achieved Water Positive Status in 2014, this means the amount of water withdrawn for industrial usage is less than the amount of water given back to society and nature.

ESG investing taking off in India?

Analysts believe that ESG compliance has improved by Indian companies over the last years, taking cues from rising curiosity in ESG investments.

ESG-benchmarked investing is gaining ground in India, with global as well as domestic investors taking more sizeable shifts towards such ESG investment approaches. ESG funds in India witnessed an inflow of more than half a billion dollars from January to March 2020, a jump of 76% as compared to the preceding fiscal, according to Morningstar data. The Indian mutual fund industry also witnessed the launch of several new ESG funds in the second half of 2020-21.

“Both institutional and retail investors have shown increased interest in ESG investment,” Upadhyaya says. “Such increase is seen due to the global campaign and awareness with regards to ESG. Many domestic asset managers launched their first ESG funds during 2020, and now under ESG category nearly USD 1.5 bn worth of assets are being managed.”

Amid rising investor interest, India market regulator SEBI has also pushed for more stringent ESG-related disclosures, requiring firms to disclose their ESG policies in a standardized format. SEBI has mandated the top 500 listed Indian companies to report non-financial parameters. This has shot up ESG initiatives as well as disclosures by listed companies.