Given its relatively prudent and reasonably proactive anti-Covid-19 measures and growing ESG-consciousness, India has emerged as one of the world’s safest harbours for Environment, Social and Governance (ESG) investing.
Sudhir Raikar
ESG in the Covid-19 era… and beyond
The Environmental, Social and Governance (ESG) investing paradigm has come a long way from its formative years of groundwork laid by the United Nations Principles for Responsible Investing (PRI). Ever since 2015, the European continent has steered a consistent growth in ESG investing. The year 2017 proved a landmark year, registering an impressive 37 percent rise as per a Bloomberg Intelligence study.
However, one singular event in 2020 has posed a ‘make-or-break’ litmus test for the policy makers and practitioners of the ESG investing paradigm: the COVID-19 pandemic. This gargantuan catastrophe has brought the world to an abrupt standstill, crippling even the most advanced health care systems, established social structures, and robust economies with unprecedented brutality. The spate of draconian measures like stringent lockdowns and constricting curfews launched by nation after nation has negatively impacted investors across the globe. In consequence, ESG compliance has now become more complex than what it already was, calling for clear and precise mechanisms for strategy, execution and evaluation including user-friendly and effective metrics and data standards.
Needless to say, corporate discipline assumes critical significance in these trying times and even beyond. The societal impact of a company’s performance and behaviour will now be necessarily linked to its profitability, growth and sustainability. To make matters more challenging, the impact across industrial and business landscape will largely vary – depending on the type and extent of federal restrictions and stipulations laid down for each sector. In a nutshell, ESG has become more significant than ever before, acquiring a more profound meaning in one stroke, like how the concept of ‘work from home’ has. What was once almost an ornamental option, work from home has now become a dire need.
Also known as sustainable investing, responsible investing, impact investing, or socially responsible investing, ESG is all about fulfilling objectives on three crucial fronts. Environmental concerns imply the entity’s efforts to safeguard and preserve the natural environment surrounding its facilities and operations. It’s about evaluating how effectively a firm addresses environmental factors like energy usage, climate concerns, emissions and waste management, pollution control, and treatment of animals. Social objectives in the context of ESG point to responsible, ethical and enduring relationships with different stakeholders including employees, suppliers, customers, and the community. Governance refers to the evaluation of the company’s vision, mission, values and leadership, management styles, compensation structures, and protection of shareholder interests. It includes the study of accounting methods for accuracy and fairness, as also other practices to check conflicts of interest, political influence, illegalities or financial irregularities.
Post Covid-19, how a company engages, motivates, rewards and reprimands its employees, how it treats its customers, investors, and other key stakeholders will be observed under the microscope and any gaps or glitches will now have a near-fatal impact on a firm’s reputation. CSR, which is a small but significant aspect of ESG, will also undergo a massive transformation even as the world monitors and measures how corporates are helping communities fight this battle, whether through sponsoring ventilators, sanitisers and anti-Covid kits, offering free products and services, running community campaigns or donating to charity.
The PRI, an investor initiative in partnership with UNEP Finance Initiative and UN Global Compact, has already launched a signatory drive to help responsible investors deal with the Covid-10 crisis. PRI believes that the crisis will pose a larger question going forward: are our financial systems geared to respond to such threats in good time? PRI has identified seven immediate investor actions including engaging companies failing in crisis management, extending public support for an economy-wide response and maintaining a long term focus in investment decision making.
India’s ESG environment: ripe for transformation
Over the years, India has enforced a reform-led regulation following glaring instances of corporate fraud, scandals and financial irregularities. While the RBI and Ministry of Corporate Affairs have issued guidelines for Corporate Social Responsibly, Sustainable Development, Responsible Business Conduct and Non-financial Reporting from time to time, the SEBI has been remarkably agile towards ensuring more efficient and effective board structures (expanded eligibility criteria for independent directors, enhanced risk management, board meet quorums and the like) and more transparency for investors and stakeholders (mandatory AGM webcasts, audit, related-party disclosures and quarterly result disclosures) It’s pertinent to note that the 2018 SEBI proposals were based on the Uday Kotak committee which made over 80 recommendations to improve the quality of corporate governance. In a nation where around 45 per cent of corporates are family-owned setups, these ripples of reform are indeed a credible feat.
Although India is way below global ESG benchmarks, it is treading a trajectory of steady improvement, having committed itself towards the accomplishment of the 17 Sustainable Development Goals defined by the United Nations 2030 Agenda for Sustainable Development. Apex body NITI Aayog has tailored the 17 markers in line with domestic realities to develop the Sustainable Development Framework (SDF) for 2018–22. The allegiance to the sustainability agenda speaks volumes about India’s ESG awareness.
Having said that, it is only in recent times, that Indian stakeholders have begun to appreciate the essence and credence of the E, S and G in ESG, as also the inevitable financial and stock market impact of the of elusive ESG risks. Given that Covid-19 has underlined ESG’s criticality with a resounding thud, we can expect positive action across many fronts in the time to come...among other things, more actionable audits and thorough evaluation of their effectiveness, as also institutionalization of corporate governance best practices which are likely to fetch an investment premium for the practitioners and, more importantly, enthuse the laggards to follow suit.
Most Indian entities have learnt it the hard way that ESG is not merely an academic ethical concern. The seemingly non-financial impact of ESG slippages, they have come to realise, invariably translate into huge financial losses, massive loss of reputation, and tumbling stock prices. Indian corporates have now begun to put ESG compliance in perspective, as an effective compliance that helps global investors mitigate the risks residing in promising bets, risks that invariably become apparent in the medium to long term and are hence more perilous in nature.
Perhaps the most striking endorsement of India’s commitment to ESG compliance comes from the way the Indian government and its populace are countering the Covid-19 threat, putting lives above livelihoods in the first phase of nation-wide lockdown and blending the two in the subsequent phase of selective lockdown. India took a draconian step proactively and purposefully, which had an immediate impact in the form of manageable Covid numbers notwithstanding the hardships faced by the deprived sections in particular. Given our exceptional population density, vast geographical expanse and overwhelming parochial diversity, our Covid infections and fatalities are not alarming. Without the stringent lockdown, these numbers could have ballooned to exponential highs. Not compromising on all three elements of ESG, India has practiced the best form of compliance which speaks volumes of the nation’s ESG-conducive environment.
India’s tryst with ESG: a closer look
Compared to the West, India’s participation in ESG investing is yet miniscule, notwithstanding the participation of domestic asset management companies and thematic funds. Some market experts reckon it would take a decade for the ESG concept to take root in India while others feel the awareness is already substantial and an effective industry data standardization initiative will make ESG an integral part of compliance disclosures and reports.
While India’s share in ESG investing may be low, it is already home to ESG funds in a big way. According to the Global Sustainable Investment Alliance, over 40 environmentally and socially conscious global investors have committed around 25% of ESG funds in Indian stocks while 95 socially responsible global funds have locked in close to 19% in Indian companies.
An incisive report by Edelweiss Securities titled “Seeking Growth the ESG Way” reveals a noteworthy statistic: India’s share of investments in global ESG funds aggregates to about USD 25 billion in ESG-benchmarked equity investments. This, Edelweiss believes, is indicative of the likely domestic shift in the time to come, towards an ESG-centric investment approach.
The global thrust have had a contagious effect on the Indian landscape already. The awareness is two-fold, led by corporates and markets alike. India’s top corporate houses including Reliance, Mahindra & Mahindra and Aditya Birla Group have launched their corporate sustainability initiatives in a big way. As mentioned earlier, many mutual fund houses have announced ESG offerings complete with comprehensive checklists of parameters and markers, as also allocations based on threshold scores. While we already have SBI Magnum Equity ESG and Quantum India ESG Equity investing in companies scoring high on ESG parameters, Axis ESG has been recently launched while ICICI Prudential ESG is in the offing. Quantum Advisors has launched a $1-billion ESG fund.
ESG literature is now well known to key stakeholders, thanks to landmark initiatives. In April 2018, Kotak Asset Management signed the United Nations-supported PRI to spearhead responsible investing in India. while Avendus Capital has put in place a ranking framework covering ESG principles in conjunction with the Institutional Investor Advisory Services (IIAS). SBI Mutual Funds is possibly the only Mutual Fund in India to voluntarily embrace CFA Institute’s Asset Manager Code of Conduct. Reportedly, SBI Mutual fund had opposed Maruti's plans to set up a plant in Gujarat as a fully-owned arm of its Japanese partner Suzuki Motor Corporation. This was a sterling instance of a fund intervention to prevent decisions scoring low on ESG parameters through an effective dialogue, thereby promoting an appropriate action in favour of better ESG compliance.
The Indian stock market has dramatically matured a lot in recent times. Even retail investors are now quick to spot and single out stocks grappling with governance issues or those plagued with financial irregularities or ethical issues. Thanks to the ubiquity of media broadcasts – web, electronic and print – and comprehensive awareness campaigns launched by SEBI and major bourses, the market preference is shifting in favour of promising stocks from sunrise sectors, those with long-term themes ripe with the promise of disruptive innovation and led by professional managements. The word ‘multibagger’ is no longer the unbelievable lure it was a few years back. Given this market maturity, the investing tribe has become naturally attuned to ESG-conscious investing and hence more appreciative of its enduring benefits.
India as an ESG harbour: Rock-solid value proposition
Just like how the Indian markets have only recently fathomed the import of ESG compliance, the West has only just sensed the potential ESG rewards lurking in the Emerging Markets (EMs), way above what the existing investment volumes promise. Credible investment players like the Columbia Threadneedle Investments and the renowned sustainability consultant Flat World Partners have drawn the world’s attention to promising EM bets thriving on the sustainability theme. In this context, UBS Global Wealth management puts forth a pertinent point: given the host of environmental issues that an EM populace deals with on a day to day basis – air pollution, untreated sewage, mounting garbage, rickety health facilities - they deeply feel the need for launching sustainability initiatives, so also the need for improving corporate governance given the immediate and often lethal impact on share prices. Going forward, good corporate practices in EMs will no longer be viewed as a compliance burden when its benefits will become more and more apparent in the time to come. Catastrophes like the Covid-19 has shown us what nature’s fury is all about and why we need to protect our environment from unforeseen attacks, whether ecological or biological.
Talking of the Covid-19 catastrophe, China has taken an obvious hit across many fronts: a tarnished image amid growing doubts and debates on the Corona virus origins, protection norms announced by many nations to check predatory investments from China as also proposed corporate exits, and erratic production and supply chain disruptions even as the dragon nation is slowing limping back to normalcy.
Unlike popular perception, every EM has a character of its own and although most EMs seemingly flock together in response to world events (dollar movement, oil price fluctuations and the like), each EM has its own set of SWOTs. India with its well-insulated domestic economy, relatively low exposure to China (both imports and exports) and mature markets is increasingly being seen as a greener pasture for placing prudent ESG bets, especially in the guiding light of its purposeful Covid-19 strategy. More importantly, India’s growth story despite occasional hiccups like banking system woes and suppressed home consumption is in itself a significant lure for the global investment community. Already, media reports are hailing India as the new ESG hotspot. However, we reckon India’s value proposition is more credible than a what the word ‘hotspot’ implies, especially given its negative connotation in the context of the Covid-19 pandemic. We reckon India is capable of becoming the world’s ESG harbour, the cape of good hope for prudent and purposeful ESG investments.
To institutionalize a robust ESG culture towards strengthening and sustaining our global competitiveness, the Institute of Cost Accountants of India is committed to partner with various stakeholders in various ways:
- Working closely with the Indian corporates to help them spot elusive ESG risks, develop ESG-aligned strategies and operations, and win their unconditional buy-ins to the ESG agenda towards promoting ethical and responsible business practices.
- Working closely with the Ministry of Corporate Affairs and SEBI to standardise and simplify the ESG-specific terminology and metrics, as also initiate and enhance proactive communication with market participants, placing more emphasis on trust and collaboration, which may help minimise the need for punitive action.
- Acting as a key catalyst for bringing together government regulators, audit agencies, corporate players, investment firms, sustainability experts, and legal professionals for a more solution-centric dialogue on ESG compliance, as also support ESG capacity building programs and ESG research and analytics.