We live in a complicated interconnected world. If anything, Covid-19 has shown us how co-dependent we are as global residents and economies. This has forced an increasing focus on Environmental, Social, and Governance (ESG) parameters in the manner Management form policies, companies operate, and financial companies invest. The need for ESG has further increased in the backdrop of this pandemic. As a nation, we must be vigilant of the risks emanating from difficulties of this nature. In the original few months, certain indicators have emphasised how companies that are ESG obedient are pre-disposed to benefit hugely from this shift in mindset.
India’s ESG stress may benefit compliant companies
A report issued recently by global think containers, including TERI (The Energy and Resources Institute) says that India was the only “2°C harmonious” country and the only G20 country which is on track to meet what it had pledged under the Paris Agreement (The Paris Agreement’s central aim is to strengthen the global answer to the threat of climate change by keeping a global heat rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase yet further to 1.5 degrees Celsius). Aligned to these efforts, in the recently held Virtual Global Investor Roundtable (VGIR) 2020 by the Prime Minister, which was accompanied by heads of 20 top institutional investors from across the world, there was a definite and clear message from the Government of India on its dedication towards ESG. In this forum attended by some of the world’s largest institutional investors, the Prime Minister stressed India’s locus on ESG and how it will follow the path of growth with equal focus on the Environmental, Pleasant, and Governance parameters. This in a way sets a future roadmap for India Inc. to include ESG in an increasingly active way. Those companies that are already compliant and require high ESG scores stand to gain further, as well as see increasing investor interest. Probable incremental strategies and incentives from the Government will only further propel these companies and sectors.
Possible differences in U.S. climate policies could boost ESG investing
Moving from India’s ESG focus, let’s look at the United States of America which just created a Presidential election the whole world was watching. The U.S. so far lags far back Europe in ESG investing. According to Morningstar, of the whole global ESG assets, European funds alone held 82% of it in the third quarter while U.S. funds held 14%. The incoming new president of the United States of America and their extensive focus on climate and plans for implementing policies around environmental change can be beneficial for India in terms of collaborating with the U.S. towards this direction.
Firstly the new government had already stated it will join back the Paris Climate Agreement if it came to power. The President-elect has previously appointed a Special Presidential Envoy for climate, the same person who is considered to be one of the main architects of the Paris accord, who has been committed to fighting climate change full-time. Many think that sustainable investing will align perfectly with the new regime’s policies to address issues around climate change and boosting clean energy. There are also plans for making electricity generation carbon-free, innovation in clean energy, zero-emission public transportation, and use of electric vehicles, etc. These plans can move many companies that are part of the ESG universe.
This is the appreciation of the fact that the incoming President has been vocal in the past about the importance of Indo-US relations and their potential. This can open streets for working together, among other things, towards initiatives in the environment and sustainability place. The two countries can collectively work collaboratively on research and development in the space and projects that are of interest to both.
ESG could be a key determinant for foreign investment in India
Large investors and institutional players, particularly in the US and Europe, are now increasingly investing in companies that meet ESG standards. Globally, sustainable buying assets in the five major markets rose to $ 30.7 trillion in 2018. The reason being frequently investors are being cognizant about the risks involved around ESG factors outside of pure financial risks while buying in a company. There have been several instances in which due to governance issues, or unethical labour laws a company has seen important value erosion. In the 2019 Green Intelligence report by The Economist, some 95% of respondents thought that ESG investing is important to their firm, and the overwhelming majority expected that to increase over the next three years. More than 80% considered ESG has a positive financial impact.
For India to attract such investors and increasing the share of FDI in this country, which in turn will create massive employment, the government policies have to focus on ESG parameters. Going by the Prime Minister’s recent analysis, as well as some of the steps taken by the country as part of the Paris Agreement, the prospects look promising. Production is also underway to achieve the country’s carbon intensity reduction and non-fossil fuel power growth capacity commitments by 2030 as part of the Paris accord. India is also the only “2°C compatible” nation among G20 nations. In accession to this, India’s reaffirmation of its commitment towards ESG and the likely steps from the U.S. to perform policies towards the same will be advantageous for companies that have and will conform to such measures and best practices going forward. The inflow of foreign funds augurs well both for capital demands as well as individual sectors and businesses in driving India’s next leap of maturity. Market data suggests that our two years of fundraising in key global markets like the U.S. & Europe has seen ESG obedient businesses like Technology, Pharma, and Financial Services being top beneficiaries of new capital. Studies show that sound sustainability measures lower the cost of capital of companies.
The European Union has already announced several ESG regulations that include, among others, non-financial reporting directive, sustainability-related declarations regulation that requires investment firms and asset owners to make declarations on the integration of ESG risks, and Taxonomy regulation that sets out a common classification system for economic enterprises to be considered environmentally sustainable with a focus on sectors that play a key role. What does this mean? That European investment firms will consider ESG scores for tapping in money. Then we have the U.S. which is one of the main sources of the metropolis for the markets and given the excess liquidity and near-zero interest rates, emerging exchanges such as India are likely to serve. If the U.S. pushes the lever on its climate policies and comes up with EU like guidelines, one can expect more foreign purchases chasing the ESG compliant companies.