ESG In India: Bridging Intent With Action

The historical development and regulatory landscape surrounding ESG (Environmental, Social, and Governance) considerations in India have deep roots within its legal framework, particularly highlighted by the enactment of the Companies Act in 2013.

This legislative milestone positioned India as a frontrunner in mandating Corporate Social Responsibility (CSR) expenditures.

Section 135 of the Companies Act stipulates that companies meeting certain financial thresholds must allocate a minimum of 2 per cent of their average net profits from the previous three years towards CSR initiatives. Since its implementation in 2014, there has been a remarkable surge in cumulative CSR spending by Indian corporations. Total CSR expenditure, has increased from Rs 8803 crore in 2014-15 to Rs 25,932 crore in 2021-22.

Moreover, additional regulatory strides were taken with the adoption of the Stewardship Code by the Securities and Exchange Board of India (SEBI) in 2019. This code applies to all mutual funds and various categories of Alternative Investment Funds (AIFs), stressing the responsibility of institutional investors to ensure their investee companies adhere strictly to robust ESG principles.

ESG: The Investment Frenzy – A blend of Profit and Purpose

Amidst the green euphoria, scepticism looms—will ESG investments deliver on their promise of both profit and purpose, or will they succumb to the pitfalls of greenwashing and short-termism?

The allure of ESG investments has captivated the imaginations of investors and corporations alike, fuelling a frenzied rush into sustainable ventures.

According to a leading consulting firm, ESG-aligned assets attracted $4.5 billion in investments, with $1 in $5 of PE-VC investment going to ESG in 2023 underscoring the seismic shift in investment appetites.

Deloitte's recent survey linking ESG scores to enhanced EBITDA multiples reinforces the story of sustainability as a value creation engine. The voluntary disclosure of ESG practices by NIFTY 50 companies signals a growing acknowledgment of the materiality of ESG factors.

Despite ESG reporting being obligatory only for the top 1,000 listed companies, a remarkable four out of five companies on the NIFTY 50 voluntarily disclosed information regarding their ESG practices. Furthermore, Indian companies have begun actively seeking ESG ratings or scores.

Stakeholder Expectations and the ESG Imperative

The fabric of corporate ESG strategies in India is increasingly woven with the threads of stakeholder expectations, and the same are reshaping corporate ESG strategies, with public scrutiny emerging as a potent force driving sustainability agendas.

A global survey in 2023 stated that 54 per cent of CEOs in India — compared to 69 per cent CEOs globally — have fully embedded ESG into their business as a path to value creation.

The exponential growth of ESG funds managed by Asset Management Companies (i.e. according to Avendus ESG-focused equity funds in India have grown from $330 million in 2019 to $1.3 billion in June 2023), attests to the expanding investor appetite for sustainable opportunities. The SBI Magnum, Axis ESG Equity, and Kotak ESG Opportunities Funds are some of the top retail investor centric funds available as on date.

The Green Finance Evolution: From Novelty to Necessity

Will the Sovereign Gold Bonds, morph into avatars of green hope? Will they redeem our carbon sins or merely gild them? India's foray into green finance has been characterized by a flurry of activity, with green bonds emerging as the poster child of sustainable capital allocation.

Fitch Ratings said that as of January 2023 in India, GSSS (Green, Social, Sustainability and Sustainability-linked Debt) bonds accounted for $20 billion or 3.8 per cent of the country's overall corporate bond market, this stresses the nascent yet promising trajectory of green finance in India.

However, the dominance of public sector entities and financially robust corporates in issuing green bonds raises questions about inclusivity and accessibility of green finance. The establishment of the Green Finance Working Committee (GFWC) to oversee green funding projects signifies a step in the right direction. These initiatives will catalyse a systemic shift towards sustainable finance and not remain confined to the periphery of mainstream capital markets.

Corporate Sustainability: From Commitment to Action

The corporate landscape is rife with tales of virtue and valour, as companies navigate the treacherous waters of ESG integration. Deloitte's ESG preparedness survey 2023 unveils a stark reality. It states that only 27 per cent companies are equipped to meet their ESG compliance requirements while just 15 per cent think their suppliers are ready to comply with the commitments.

While progress has been made, significant gaps remain in organizations' capabilities to meet ESG obligations. Yet, there are some north stars we can aspire towards: Tata Consultancy Services' audacious pledge to slash emissions up to 70 per cent by 2025 and Infosys' achievement of carbon neutrality 30 years ahead of the prior 2050 timeline serve as testament to corporate commitment to sustainability.

In March 2023, a new funding spurred India's renewable energy capacity and helped improve access to climate finance, with International Finance Corporation (IFC) investing INR 3,750 million (about $50 million) in a sustainability-linked bond (SLB) issued by Tata Cleantech Capital., a joint venture between Tata Capital Ltd. and IFC. This marks the inaugural issuance of such an instrument by a private financial institution in India.

Technological Innovations: The ESG Catalyst

Technological innovation holds the key to unlocking ESG potential, with blockchain, AI, and big data analytics heralding a new era of sustainability.

ReNew Power's utilization of predictive analytics to optimize renewable assets exemplifies the transformative power of technology in driving ESG performance, ReNew's ESG performance rated best among electric utilities & IPPs in India and second globally. Blockchain's promise of transparent supply chains and AI's role in ESG risk assessment offer enticing glimpses into a future of data-driven sustainability. However, as startups like SatSure and Blue-Sky Analytics pave the way for environmental monitoring and analysis through satellite monitoring, the ethical dilemmas surrounding data privacy and algorithmic bias loom large.

Much work needs to be done by regulatory bodies for enforcing the newly minted data privacy bill (Digital Personal Data Protection (DPDP) Act 2023) as the ecosystem matures.

Navigating the Regulatory Maze: SEBI's Bold Moves

SEBI's gambit: The Business Responsibility and Sustainability Reporting (BRSR) is a beacon of hope for transparency.

Regulatory interventions have been a double-edged sword in India's quest for ESG integration, with promises of transparency diluted by the pitfalls of fragmentation and ambiguity. SEBI's introduction of the BRSR and the regulatory framework for ESG Rating Providers (ERPs) signify substantial strides towards enhanced ESG disclosure and assurance.

Nevertheless, the efficacy of these measures’ hinges on widespread acceptance and adoption by corporations and investors alike. The Union Government's proposed Indian Carbon Market offers glimmers of hope in the fight against climate change. Together with widespread acceptance of this new framework, ESG reporting and hence ESG assurance will grow stronger in the Indian market in the coming years.

The Road Ahead: ESG's Indelible Mark on India's Corporate Landscape

The evolution of ESG in India is marked by notable regulatory progress, increasing corporate dedication, and a rise in ESG-focused investments, in turn reinforced by technological innovations. With the Indian government and regulatory bodies persistently advocating for sustainable development and responsible business practices, alongside growing awareness and investor demand for ESG-compliant opportunities, India is poised to emerge as a leader in ESG integration within the emerging market landscape.

Transparency and comprehensive ESG integration are becoming imperative, with surface-level approaches becoming outdated. Companies are expected to ensure that ESG compliance is substantive and goal-oriented.

Whether one supports ESG or not, we are strapped in for the ride, with a singular truth—India's ESG project is a saga of ambition, adversity, and audacity—a journey that will shape the destiny of the entire domestic market with implicit ramifications for the world.

Sohom Bhowmick is Director of Policy at Smahi Foundation of Policy and Research and Rahul Saxena is a consultant specializing in ESG solutions.