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ESG investing involves evaluating and investing in companies that prioritise environmental, social, and governance aspects in their business practices. These companies are focussed on environmental preservation, leading social impact initiatives such as employee welfare, philanthropy, etc. to drive positive change, and follow strong governance standards.

ESG Investing in India:

ESG investing has gained significant traction in India in recent years led by regulatory changes, and increased investor awareness and preference. According to the India Private Equity Report 2023 by Bain & company, ESG investments in India totalled $7.9 billion or 13% of the total private equity and venture capital investments of $61.6 billion in 2022. This is an increase of nearly 2.4 times over 2021.

As of now, ESG investments are majorly apportioned to the green energy segment and electric vehicle manufacturing. Nearly 90% of the $19.2 billion in ESG investments between 2018 and 2022 have been pumped into these two segments.

The Securities and Exchange Board of India (SEBI) has also recently introduced Business Responsibility and Sustainability Reporting (BRSR). This is a step forward that aims to counter the issues relating to standardisation of data and its regulation. All BRSR disclosures are mandatory for the top 1,000 publicly listed companies. This provides investors with uniformly reported information based on which they can ascertain where to invest.

SEBI has also recently proposed allowing mutual funds to introduce five new categories under ESG schemes. However, at least 65% of the asset under management of these schemes should be invested in listed entities that follow the BRSR code.

Who should invest in ESG companies?

As companies increasingly focus on ESG, their businesses become more transparent and instil greater investor confidence. This in turn makes them good investment options as they are more trusted and less prone to any disruption.

ESG investing is ideal for investors who want to earn financial returns but also equally value social and environmental outcomes of businesses. It is also ideal for those who want to showcase their commitment towards responsible business practices.

ESG investing is a great way to distribute risk exposure of portfolio and making investments robust and resilient while keeping ethical and moral beliefs intact.

There is immense scope for growth in retail investor participation in sustainable funds in India. Accroding to data compiled by Morningstar india, 12 ESG funds together clocked assets under management (AUM) of Rs 10,427 crore in March 2023. Sustainable or ESG funds in India typically have exposure to themes such as renewable energy, low carbon, green transport, and environmental protection.

Challenges of ESG Investing in India:

Although investors are taking to ESG investing at a rising pace, there are still some challenges that make it look lacklustre.

Large capital requirement: It is not easy to tackle the effects of climate change and address the prevalent inequalities in our society. Such initiatives demand a lot of capital which is itself hard to come by. To address this problem, Indian companies need to garner funds through the issue of ‘green bonds’ or ‘social bonds.’ In November 2022, a set of rules and regulations for Sovereign Green Bonds was approved by the government as a landmark move in this direction.

ESG disclosures: There is a lack of standardisation when it comes to data collection and reporting. The lack of standardisation means that multiple interpretations and standards arise out of the existing norms and are prone to bias. There are also no standards on ESG disclosures by companies. While BRSR addresses this issue to a certain extent, greater uniformity is required to incorporate the varying local conditions across regions.

Talent acquisition: ESG investing is an upcoming philosophy and not everybody is familiar with it. The analysis and incorporation of this philosophy into a running company is a challenging task, which requires the right talent for effective implementation. Ongoing training and upskilling efforts can help.

Conclusion:

As investors become more cognizant of the environmental and social concerns, they are demanding more transparency in business operations. They are realising that focusing on ESG is not only a step in the right direction, but it also reduces the risk exposure of their portfolio.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Do’s and Dont’s issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Brokerage will not exceed the Exchange prescribed limit.