Sustainability-focused investing, now pegged as environmental, social and governance (ESG) led investing has picked up pace in India over the past year. Assets invested in Indian ESG funds have grown to Rs 12,000 crore at the end of June 2021, a whopping 184 percent increase over the number of June 2020. While Morningstar Inc., a financial services company, estimates that the growth was faster in the second half of 2020 when compared to the first half of 2021, the overall annual growth rate is still huge. Even if it moderates substantially, the quantum of Indian ESG assets will keep galloping ahead. This triple-digit growth corresponds with the growing awareness in India on ESG and its crucial role in the future of a modern company. It is a good beginning. However, for perspective, we might consider the fact that the total global assets in ESG funds are estimated to hit $53 trillion by 2025. So in India, ESG investing has a long way to go — and therefore it presents a great opportunity for businesses working out of India to make the most of this wave.
In a recent study by Harvard Business Review (HBR), 70 executives were interviewed in 43 global institutional investment firms and it was found that ESG was almost universally on top of the mind for these executives. Of course, investors have been voicing concerns about sustainability for several decades. Most of the investment leaders in the HBR study described meaningful steps their firms were taking to integrate sustainability issues into their investing criteria.
As a concept, ESG has been around for a long time with its origins going back as far as 2005. In the meantime, we have seen other ideas like socially responsible investing or SRI that would screen investments in sectors with negative connotations. Another concept that spoke about responsible corporate behavior and management was the one about triple bottom line, a business concept that expects firms to commit to measuring their social and environmental impact in addition to their financial performance or focusing on generating profit, generally referred to as "bottom line", as described by HBR.
Today ESG actually emerges as a tool for the management to deliver great returns to all stakeholders of a business. Many tenets of the idea have been written into laws. Stock exchanges across the world seek to report on ESG principles and at the same time ESG compliance opens up doors for global funding for businesses across the world. For a CEO who cares about the long-term sustainability of the business, ESG is an opportunity to create value, drive profitability and also raise capital. ESG bonds have already made a mark in India with Indian companies raising close to $5 billion in calendar year 2021 so far.
As a result of this awareness and the linking of capital to ESG fundamental changes have happened in management philosophy. Sustainability, corporate social responsibility and governance have moved from the sidelines to the centre of the boardroom table. They have also become part of strategy for better profitability and higher operating margins. ESG compliant products, or services with responsible supply chains have started becoming popular with customers. It is true even for heavy industrial sectors like the construction and building material industry.
ESG reporting is still evolving in India. Market regulator Securities and Exchange Board of India’s new Business Responsibility and Sustainability Report (BRSR) standards will be applicable to the top 1,000 listed companies based on market capitalisation and will become mandatory from financial year 2022-2023. The new standards will help investors compare the ESG performance across companies and sectors and make more informed investment decisions. For business leaders, the real challenge is not only about getting the ESG priorities right but more importantly making sure it is an integral part of the organisation’s culture and DNA.
The author is CEO of Holcim India and MD & CEO of Ambuja Cements Ltd.
The thoughts and opinions shared here are of the author.
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