Following COP26 an emphasis on sustainability within the financial sector has increased substantially. Specifically, investors are looking to invest in sectors with a strong environmental, social, and governance (“ESG”) focus. India has 10 ESG-exclusive funds, 6 of which were introduced in FY21. This has diversified ESG investment portfolio in the country. 

While ESG investment is relatively new to Indian investors, the recent trend in the Bombay Stock Exchange (“BSE”) has shown a favourable turn to sustainable investment. Over the course of the pandemic, S&P BSE Greenex and S&P BSE 100 ESG, investment indices of BSE, have grown considerably relative to the previous years. In fact, sustainable funds in India have had their assets increased over two-fold to USD 1.3 billion in the past year. This indicates increasing awareness on the integration of environment, social and governance factors in the country. 

The pivot to ESG can be correlated to the first pandemic-driven lockdown in India between March 2020 to May 2020. This was when both S&P BSE Greenex and S&P BSE 100 ESG had positive average daily returns. Lack of a strong public infrastructure has put considerable onus on the private sector to mitigate the aftermath of the pandemic. Covid-19 relief work has become a key factor in corporate social responsibility, giving a sudden boost to sustainable corporate practices. 

Chirag Mehta, Senior Fund Manager at Quantum AMC in India has attributed this to change in the economic environment from the financial crisis to the Covid-19 crisis. Financial risk no longer solely governs investment patterns. Investors are increasingly interested in how physical risk (e.g. corporate governance and the environment) can impact financial markets. The pandemic has acted as a litmus test of a company’s ability to survive precarious market conditions. ESG reports provide investors with an assessment of how companies have managed the situation. Companies with flexible governance structures and focus on employee welfare have fared better within the ESG parameter, especially with increasing spotlight on labour rights issues.

Companies in India have started to realise the financial benefits of investment in ESG. An industry to watch out for is cement. Cement companies have started installing waste heat recovery systems (“WHRS”) that store heat energy generated during the manufacturing of cement to use as an additional source of power. Peers Ambuja Cement Ltd and ACC Ltd have collectively invested over INR 780 crore (USD 104 million) to build a WHRS capacity. The installation of WHRS has proven to be especially cost-effective as it reduces company expenditure on electricity. Effective resource utilisation, increase in public reputation, and longevity of business development are key benefits of investing in ESG. 

Lack of transparency remains a challenge for foreign investors looking to invest in India. However, measures have been taken to improve credibility of ESG practices in Indian firms. Standardised means of disclosing ESG practices is key in mitigating investor apprehension. Market regulator, Securities and Exchange Board of India, has proposed the Business Sustainability Reporting guidelines to increase transparency in ESG disclosure practices of companies. 

India has great potential for investment in ESG as can be seen in the upward trend in sustainable investment. Although sustainable investment remains novel in India, growth in ESG-focused indices and focus on sustainable corporate practices after the Covid-19 pandemic indicates favourable returns on investment are now possible.

By Paakhi Bhatnagar, Research Analyst at Audere International

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