ESG Investing on the Rise in India: The Benefits and Challenges of Incorporating Sustainability into Investment Decision MakingAnil Birla | January 16, 2023
Environmental, social, and governance (ESG) refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies and assist investors in deciding whether a company aligns with their values.
In recent years, there has been a growing trend towards incorporating ESG factors into investment decision making. This is due in part to increasing awareness of the need for sustainability and social responsibility, as well as the belief that ESG performance can impact a company’s financial performance.
In India, the concept of ESG investing is relatively new, but it is quickly gaining popularity due to the country’s commitment to sustainability and the potential financial benefits of ESG investing.
Some key statistics on ESG investing in India include:
- According to a report by the Indian School of Business, the total assets under management for socially responsible investing in India was approximately $10.5 billion in 2018. This represents a significant increase from just $2.5 billion in 2014.
- A study by the International Finance Corporation (IFC) found that companies in the top quartile for ESG performance had a higher return on assets and a lower cost of capital compared to those in the bottom quartile.
- The Global Impact Investing Network (GIIN) reports that the total assets under management for impact investing in India was approximately $7.4 billion in 2018, a significant increase from just $1.1 billion in 2014.
- In 2019, the Indian stock exchange (NSE) launched a new index called the Nifty 500 ESG index, which includes the top 500 companies listed on the exchange based on their ESG performance.
There are several key drivers behind the growing interest in ESG investing in India. One is the country’s commitment to sustainability. The Indian government has set ambitious goals for renewable energy, including a target of generating 40% of the country’s electricity from renewables by 2030. This commitment to sustainability has led to increased investment in renewable energy and other environmentally friendly industries.
Another key driver is the belief that ESG performance can impact a company’s financial performance. A study by the Indian School of Business found that companies with strong ESG performance tend to have lower volatility and higher market value. In addition, a survey conducted by the Confederation of Indian Industry (CII) found that 80% of companies in India believe that ESG performance is important to their investors.
One of the key reasons why ESG investing is gaining popularity is that it is closely linked to achieving the United Nations Sustainable Development Goals (SDGs). By investing in companies that are committed to sustainability, investors are also contributing to the SDGs, which include targets such as reducing poverty and inequality, protecting the environment, and promoting economic growth. ESG investing is a way for investors to align their financial goals with their values and make a positive impact on the world.
There are also a number of private sector initiatives focused on ESG in India. For example, the India Corporate Sustainability Forum (ICSF) is a network of over 150 companies that promotes sustainable business practices and works to enhance the sustainability performance of member companies.
Despite the growing interest in ESG investing in India, there are still challenges to be addressed. One issue is the lack of standardized ESG reporting, which makes it difficult for investors to accurately assess the ESG performance of companies. In addition, there is a need for more education and awareness about ESG investing among both investors and companies.
However, the trend towards ESG investing in India is expected to continue as more and more investors recognize the importance of sustainability and social responsibility. As the demand for ESG investments grows, it is likely that more companies will begin to focus on improving their ESG performance in order to attract investment.
Some key opportunities and initiatives for ESG investing in India include:
- The Indian government’s commitment to sustainability and renewable energy
- The potential financial benefits of ESG investing, as demonstrated by the IFC study
- Private sector initiatives such as the ICSF and the GIIN
- The NSE’s Nifty 500 ESG index, which provides investors with a benchmark for ESG performance
- The CII’s efforts to promote awareness and understanding of ESG investing among companies and investors.
In conclusion, ESG investing is an important consideration for both investors and companies in India. The country’s commitment to sustainability and the potential financial benefits of ESG investing make it an attractive option for those looking to align their investments with their values and make a positive impact on the world. As the concept of ESG investing continues to gain momentum in India, it is important that both investors and companies work to address the challenges and ensure the long-term success of this important trend.