ESG Assumes Criticality As Delhi & Other Parts Sizzle Above 50 Degree Celsius

In the first, Delhi crossed 52 degrees temperature, the highest ever for the national capital region. Experts maintain that high emissions of greenhouse gasses are causing an imbalance in nature, making our mother earth sick, raising her temperature. It is a serious call for all of us to concentrate on ESG (environment, social and governance) and tackle the deteriorating climate change crisis with a single-minded focus.

As India aims towards sustainable development growth, ESG considerations are also becoming crucial. ESG is assuming criticality in contemporary business plans, impacting investor choices and firm valuations. Businesses that place a high priority on ESG appeal more to suppliers, customers, investors, and the markets. Corporations are now integrating ESG practices into their corporate strategies to boost their valuations, particularly in the critical period before going public. In India, this trend is growing rapidly, with both domestic and international investors looking for companies that demonstrate strong ESG performance. Adhering to ESG principles can attract more investments, on better terms, and improve business globally.

Impact Investing

There is a growing trend towards impact investing, where investors seek to generate positive social and environmental impact alongside financial returns. Impact investors actively seek for opportunities to invest in companies that address key sustainability challenges, such as renewable energy, clean technology, circular economy, healthcare, education, women empowerment, and poverty alleviation. ESG considerations play a critical role in impact investing strategies, guiding investment decisions towards companies that align with specific environmental or social goals.

Investors and stakeholders increasingly prefer to engage with companies that demonstrate ethical and responsible business practices. Building a positive reputation for environmental stewardship, social responsibility, and strong governance can enhance stock value. ESG-focused companies can access a broader spectrum of capital, including green bonds, climate financing, sustainable funds, and ESG-specific investment funds.

Many countries now have mandatory ESG criteria for businesses and foreign investors. ESG compliance is and would increasingly be necessary for companies to do business in those countries that insist on getting credible ESG reporting. Similarly, it helps in raising investments where foreign investors specifically look at ESG performance.

Global Surveys

In PwC’s Global Investor Survey 2023, it was reported that investors are keen to know how companies are managing their sustainability standards. Claims in the company’s reports may be helpful but strong reliance is placed on international standards such as the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB), among others. Among major findings of the Deutsche Bank’s ESG Survey 2023, investors’ decision to completely exclude companies who do not act sustainably, is noteworthy. Amidst global climate crisis and inequalities, investors are keen on investing in sustainability leaders, sensitive to carbon footprint, waste management, and resource conservation; and in social to community engagement, and customer satisfaction. On the concerns of ESG investing and market returns, Morgan Stanley’s latest survey reveals that “Nearly 80 per cent of individual investors believe that it is possible to balance market-rate financial returns with a focus on sustainability.”

Regulatory landscape

Indian regulators are now laying great emphasis on ESG compliance. The Securities and Exchange Board of India (SEBI) has introduced mandatory ESG disclosures for listed companies and has been encouraging better governance practices. Compliance with ESG regulations is becoming integral to corporate governance in India. In May 2021, SEBI introduced Business Responsibility and Sustainability Reporting (BRSR) which requires the top 1,000 listed entities (by market capitalisation) to file BRSR as part of the Annual Report with SEBI from FY 2022-23 onwards. BRSR ensures interoperability, enabling a company to work across other frameworks. SEBI focuses on ‘reasonable assurance’ and not ‘limited assurance’, as it focuses on all the disclosures, all aspects, and circumstances of ESG reporting in detailed form. In other jurisdictions, such disclosures are voluntary. SEBI’s ‘comply-or-explain’ policy has mandated corporates to keep a check on their compliance calendars.

ESG and IPOs

It is also seen that companies with good ESG ratings are valued more during their Initial Public Offerings (IPOs). Investors are willing to pay a premium for companies demonstrating strong ESG commitments, anticipating lower risks and sustainable growth. ESG-friendly companies often see higher demand for their shares. Institutional investors, particularly those managing ESG-focused funds, are more likely to participate in their IPO, driving up demand and potentially leading to a higher initial stock price.

A strong ESG profile can create a positive market perception, which is crucial during the pre-IPO phase. Media coverage, analyst reports, and public sentiment can all be more favourable, contributing to higher investor interest. For instance, Larsen & Toubro (L&T)’s commitment to sustainability has made it among the top NIFTY 50 companies in India with a high ESG score. Tata Group’s brand value has seen incremental growth over the past due to its CSR and ESG commitments. Embracing ESG practices can provide companies with a competitive advantage in the market. IPO candidates who differentiate themselves through strong ESG performance may attract a broader investor base, command higher valuations, and achieve better post-IPO performance compared to peers with weaker ESG profiles.

India’s renewable energy

India is blessed with equatorial proximity and is the seventh-largest country in the world with a landmass of around 3.28 million sq. km., it receives a good amount of exposure to the sun for major part of the year. Our solar rooftop installations have also seen an increase of 78 per cent. India ranks fourth in wind power and fifth in solar power capacity, indicating huge potential in these sectors. In its efforts to promote clean energy and combat climate change, the US is investing USD 3.8 billion to support India’s renewable energy infrastructure goals. Private sector groups like Adanis have acquired global leadership positions in this regard, with their world’s largest ‘Khavda’ renewable energy park, etc. This sector is also expected to create new jobs for the green economy. Our natural resources and renewable energy infrastructure allows companies to invest into ESG portfolios and contribute towards sustainable development.

Way Forward

Businesses are part and parcel of society. Their social responsibility should be at par with the other stakeholders. The age-old debates of corporate social responsibility are now fine-tuned into ESG compliance and ratings. From investors to regulators, everyone is looking up to a company’s ESG portfolio, including carbon credits. It is high time that businesses, not only listed companies but also small businesses, MSMEs and startups bend their focus towards sustainability.

Dhanendra Kumar has been Executive Director at the World Bank for India, Sri Lanka, Bangladesh & Bhutan, and the First Chairman Competition Commission of India. He is currently Chairman of Competition Advisory Services LLP. With inputs from Aditya Trivedi, Associate COMPAD