BackRegulators, shareholders nudge companies to boost ESG scores
Domestic ESG funds had an average AUM of ₹9,800 cr in FY21, with 7 of 10 such funds launching after June 2020
PremiumMUMBAI : Indian businesses are racing to adopt environmental, social and governance (ESG) norms on rising pressure from investors and regulators, even as the country ranks a relatively low 120 on sustainability among 193 nations. Many companies are getting themselves measured by global benchmarks and voluntarily increasing disclosures to cement their credentials.
Reliance Industries Ltd last week said it is aligned to the global agenda of decarbonization as it aims to become a net carbon zero company by 2035. The company’s planned ₹75,000 crore capital expenditure in ‘new energy’ investments, including green hydrogen and fuel cells, are seen as ESG-positive by analysts.
Tata Steel Ltd plans to identify key ESG risks in the supply chain and collaborate with partners for risk mitigation and integrate ESG performance of supply-chain partners in procurement decision-making, the company said in an emailed response, adding it has mapped its targets to the United Nation’s 17 Sustainable Development Goals (SDGs). HDFC Bank Ltd, which aims to become carbon neutral by FY32, is offering loans for green products such as electric vehicles at lower interest rates and incorporate ESG scores while making credit decisions.
“It is encouraging to see Indian companies embracing global reporting standards and deepening disclosures," said Abhay Laijawala, managing director and fund manager, Avendus Capital Public Markets Alternate Strategies LLP. “It is also very encouraging to see Indian companies publishing integrated reports. It is a combination of push and pull factors. While regulators are increasing pressure on companies to disclose sustainability criteria, investors, too, are shifting investing preferences to firms seen as being sustainable and responsible," Laijawala said.
According to Laijawala, a company is now seen as much more than property and is not insulated from its social and natural ecosystems.
According to Kotak Institutional Equities Research, four out of five Nifty companies are voluntarily making public their ESG compliance data as investors are exploring ESG compliance for long-term sustainability. Sustainability reporting is voluntary in India, yet, 41 of the 50 Nifty companies provide detailed sustainability disclosures. This is expected to increase after the Securities and Exchange Board of India (Sebi) recently released guidelines for Business Responsibility and Sustainability Reporting (BRSR), which are voluntary in FY22 and mandatory from FY23 for the top 1,000 listed companies.
Inderjeet Singh, director, Deloitte India, said businesses that have missed ESG opportunities are catching up. “The very scale and impact of business on the environment and society are of a different order for large corporates, often resulting in higher levels of scrutiny by regulatory agencies for any material non-compliance. Being part of the large multinational ecosystem is another reason for them to remain on track with respect to ESG compliance and disclosures across all geographies. In addition, ESG disclosures have become an established channel to obtain feedback from stakeholders," Singh said. The BRSR disclosures will help improve disclosure quality, Singh added.
Experts said that many Indian businesses increasingly tap global platforms such as MSCI, Sustainalytics and S&P to get themselves rated on ESG. Investors have started looking at ESG due diligence alongside financial and legal due diligence before taking investment exposures. Such due diligence also takes into account global performance measurement benchmarks set by Sustainability Accounting Standards Board (SASB).
“Investors and consumers are two important pillars for any business value chain. While the regulatory environment plays an important role, the trigger (for regulators) often comes from market dynamics. With countries across the globe looking to boost investments, consistent ESG performance of businesses provides an additional layer of comfort to investors on the safety of their investment and expected returns. Specifically in India, the paradigm shift through BRSR, digitization of ESG performance and possible ranking of companies through ICAI are few additional triggers for such actions," Singh added.
He said if businesses are not taking note of rising global ESG assets, it is inevitable they will not qualify for future investment opportunities.
The wave of ESG-focused funds has hit India, too. Domestic ESG funds had average assets under management (AUM) of ₹9,800 crore in FY21, with seven of 10 such funds launching after June 2020, including funds from Aditya Birla Sun Life, ICICI Prudential, Kotak ESG Opportunities, Quant ESG Equity, Mirae AMC and Invesco India.
“Globally, the topic of ESG is evolving. The social and, in some cases, governance parameters are slightly on the weaker side. But all three components will have to evolve over a period of time. Globally, ESG has become more of a talking point; and so, for Indian companies. So, if companies want to be on the radar of global investors and funds, then ESG is the theme," said Shriram Subramanian, founder and managing director, InGovern Research Services.
According to Kotak Institutional Equities Research, capital goods, financials, health care services, IT services and pharmaceuticals are best placed for the ESG risk-opportunity framework. Consumer staples and telecommunication services with low risk also remain in their preferred list. Automobiles and components, construction materials, electric utilities, metals and mining, oil, gas and consumable fuels are more sensitive sectors on India’s ESG radar.
The S&P 500 ESG Index has outperformed the S&P 500 by 459 basis points over FY11-21. Outperformance is sharper in emerging markets and particularly India, with MSCI EM ESG Leaders Index and MSCI India ESG Leaders Index outperforming their respective benchmarks by 50% and 61% over the same period.
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