Why ESG Investment Will Work
Investing in ESG is progressing from just a ‘good idea' to a reality for the corporate world. The international context has become critical for Indian companies that operate or want to do business in markets within and outside India wherein ESG is the key criteria for their accountability matrix. Indian business leaders will experience inescapable pressures and scrutiny of their actions on the ESG measures such as ethics, environment, sustainability, human rights, diversity, environmental protection and inclusive growth among many other parameters.
It is imperative that investment professionals stay updated about ESG trends and factors which make a company compliant to those trends. The big corporations are realising this and are stepping up their game. This can be seen as the unpri.org, which is United Nation's Principles for Reasonable Investment official website data, “Responsible investment has gone from strength to strength in emerging markets over the past years, with 50% growth in the number of signatories headquartered there in 2020.” Today, the number is set to touch 4,000, and set to grow further and their collective worth exceeds $100 trillion. This is just one anecdote in the sea which can serve as a wake up call for those of us still turning a blind eye to ESG investing.
But why do we need sustainable investing?
As most of us would be aware, the most comprehensive framework for sustainability has been provided by the UN as a part of their Sustainable Development Goals (SDGs). It is not enough to acknowledge the comprehensive set of values outlined for corporations, but also realising the exigency of the situation. Take for instance, The World Investment Report by UNCTAD, or the UN Conference on Trade and Development, which estimates that US $5-7 trillion would be needed annually world over between 2015-2030 to finance steady progress towards SDGs.
Does this mean cutting corners on company profits?
The short answer is no. In fact, many corporations are seeing this as an opportunity to diversify their business. For instance, to meet the challenge of rising death due to preventable diseases, and rising consciousness around it given the pandemic we have just witnessed, we will witness a growing trend in medical and antibiotic development investments. Another predictive example is investment in the agriculture sector. The Cop 26 Agenda on Sustainable Agriculture pointed out why we need to alter our eating habits and why agriculture is set for a radical overhaul. This can be a potential investment site for the conscious investor. NITI Ayog has provided country specific SDG India index and with time a much closer attention will be paid to the Indian businesses commitment to attain these goals.
However, there is a catch, “Today, most of the ESG investments are understood by industries as environmental compliance and investing in CSR. There are many instances of greenwashing and repositioning of regular compliance activities under ESG.” says Niroj Mohanty Managing Director, Core CarbonX Sols Pvt Ltd, a climate change consultancy. Greenwashing will hopefully be a thing of the past, especially with the rise of climate smart vocabulary like transparency, accountability, etc. With news media, private sector and big publications spelling out what ESG means the room for error is minimising. In 2012, Security and Exchange Board (SEBI) amended Listing Agreement and made it compulsory for companies on Stock exchange to submit annual Business Responsibility Report (BRR) for top 100 companies. This mandatory requirements for filing a Business Responsibility and Sustainability Report (BRSR) from the year 2022 -2023 has expanded to 1000 listed companies (by market capitalization). These steps will bring in new levels of accountability and further emphasis on ESG investing. Henceforth, there will be some commonalities with ESG watchdogs setting the minimum standard for all companies to adhere to, while retaining regional peculiarities.
Even if we did not have the legal system backing us, recent instances of many poor corporate governances come to light (look at the NPAs and the number of cases for company liquidation in NCLT), the severity of climate change and its impact on industries and their ecosystems, and ESG activism, companies realise that failing to incorporate in their decision making process the environmental, social and governance criteria will erode the shareholder value. It makes economic sense for corporates to not only deliver financial results but also show how they benefit the ecosystem of shareholders, employees, customers and the market they operate in.
What will happen in the future?
To put it simply , the domain of investments will alter. US Corporations have spelt out their business roundtable alliance and European Commission has put out regulations which are compelling ESG performance reporting. Big corps are realizing if environmental climate risks are to be curbed, vulnerable communities cannot be left behind. As an increasing number of Indian companies have a global footprint through their business operation or linkage through the supply chain, we see increasing demand for companies to report reliable and qualitative ESG data and information. This will result in the number of companies engaging to build up their capacity and resources for ESG measures and compliances. There will be the focus on digitising the ESG reporting and comparisons. We are noticing many of the new-age companies, including blockchain and AI companies, making their presence in this space.
It is also an opportunity for young professionals to consider this field of expertise, as demand is high, but talent pool is dry. “Today, one of the biggest challenges is finding quality ESG professionals for leadership positions. In the absence of the same, companies are hiring professionals from other domains to take responsibility for ESG due to greater demand.” Notes Mohanty. We will witness ESG specialisation grow as a subject of study and employment. While the initiation is good, we still have a long way to go, notes, Vibhuti Patel, ESG Head, BluSmart notes, “Environmental, social, and governance (ESG) investments have attracted wider attention from both investors and customers worldwide. However, the practices are still in relative infancy and a wide variability exists, thus Investors should do their own research and understand the investment objectives and features when investing.”
Despite investment in ESG is just starting out, companies must see it as an opportunity as durable and long-term commitment that can deliver profitable growth rather than a challenge; it is not always risk mitigation but also a development that is creating opportunities. Many climate tech companies are evolving and creating multi-billion-dollar assets for investors in the transport, agriculture and renewable energy sector. The market is ripe for brands to invest i ethical business without fearing repercussions.
