India's regulatory push and the rise of sustainable enterprises
In the current world scenario, conforming to Environmental, Social and Governance ("ESG") norms is not an option but a necessity, influenced by multiple factors including government initiatives, global demand, trends and corporate initiatives. India has been witnessing a similar awakening in the corporate landscape, Indian companies are growing up to align their goals and strategies in the direction of ESG principles. Especially in the Micro Small and Medium Enterprises ("MSME") sector, ESG practices are considered fundamental for sustainability of business and community engagement. The largest portion of the Small and Medium Enterprises ("SME") are moving in this direction, 83% in Asia and 92% in India are following ESG focused strategies, consequently, considerable amount of MSME consumer base has also been embracing ESG focused industries.
Realising the growing importance and potential of ESG in investments and business, the Indian market regulator Securities and Exchange Board of India ("SEBI") pursuant to an amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, mandated the top 1000 listed companies by market capitalisation, to publish mandatory ESG disclosures in their annual report, under Business Responsibility and Sustainability Report framework ("BRSR"). BRSR mandated top 150 companies to provide third party assurance of ESG disclosures by FY2024 in their annual report, further scaling up to top 250 companies by FY25, top 500 companies by FY26 and finally top 1000 companies till FY2027. The structure of the framework is divided into essential (mandatory) and leadership (voluntary) indicators which also includes disclosures related to the value chain of the listed entities. The disclosure requirements mentioned under the BRSR (except for the voluntary leadership disclosures) are mandatory for the top 1000 listed companies.
Subsequently in 2023, SEBI introduced a subset of BRSR, BRSR Core-Framework for Assurance and ESG Disclosures for Value Chain ("BRSR Core Circular"). This circular provided nine key ESG reporting parameters including greenhouse gas footprint, water footprint, energy footprint, embracing circularity, enhancing employee wellbeing and safety, enabling gender diversity in business, enabling inclusive development, fairness in engaging with customers, suppliers and openness of business. According to BRSR Core Circular, the top 250 listed companies by market capitalisation on a 'comply-or-explain' basis are required to disclose Scope 3 GHG emissions (indirect value chain emissions) from FY 2024-2025 and meet assurance or assessment requirements for Scope 3 GHG emissions from FY 2025-2026.
What is ESG investing?
Environmental, Social and Governance investing means, investing while considering environment, social and governance factors alongside traditional financial factors. It is a more holistic way of investing that takes into account the impact on natural world and the society, while still focusing on the potential financial gains.
Types of ESG investing
SEBI in its circular for ESG mutual funds introduced strategies under which any ESG category schemes can be launched, the list of strategies are as follows:
- Exclusion: the funds following this investment strategy avoid investing in companies involved in harmful industries including tobacco, alcohol, gambling or fossil fuels etc.
- Impact investing: This type of investing strategy tries to achieve measurable positive environmental outcomes along with financial returns. The main focus areas of investment are renewable energy access, water conservation, and social enterprises that addresses inequality.
- Best-in-class: Funds investing through this strategy, do not exclude entire sectors, but they pick out the best performing firms in terms of ESG compliance among the sector, or it can be said, the best performing firm, among its peers.
- Sustainable Objectives: Funds investing through this strategy, focus to invest in industries or sectors, which are supposed to benefit from long-term macro or structural ESG related compliances.
- Integration: This strategy explicitly considers ESG related factors which are fundamental to risk and return of investment, along with focusing on the financial factors while forming investment decisions.
- Transition or transition related investments: This strategy's main aim is to invest in companies that provides or support environment transition.
ESG investing in India
ESG investing in India is gaining a lot of momentum in the past few years. A key driver of this transformation is government's policy and regulatory support, which has been fundamental in impelling the growth of sustainable finance in the country. Indian market regulator's proactive participation has been paving the way for this growth. Post the issuance of BRSR and BRSR core, in 2023, SEBI issued a circular providing guidelines for ESG investing under mutual funds. The circular introduced new schemes for investing as an ESG focused fund. It mandated that 80% of the AUM of the fund should be aligned with ESG compliances and the rest of the portion should not be in conflict with any ESG compliances. Additionally, minimum 65% of the AUM must be invested in companies with comprehensive BRSR disclosures, and the ones who provide assurances about these disclosures.
Growing investor awareness and these initiatives by the authorities have facilitated the growth of ESG investing, ESG funds in India now have a growing AUM of almost Rs. 10,946 crores. A survey conducted by the CFA Institute shows that 60% of the Indian investors prefer ESG investment funds for their higher risk-adjusted returns.
A recent report published by Avendus, suggests that factors related to ESG have become a prominent factor to be considered in the Indian equity capital market. According to the report, by 2051 ESG has the potential of representing approximately 34% of the total domestic AUM. Sectors focused on ESG such as renewable energy, electric vehicles, green hydrogen, and climate technology etc are predicted to be the major driving forces behind it. It is further suggested in the report that the growth of ESG inclined AUM in the coming few years could mimic the growth of Asia-Pacific growth rate of 15%-20% by 2051. According to the analysis of the report, an essential part of this growth would be through conversion of existing assets into ESG categories by the organisations actively incorporating ESG compliances in their operations. Sectors including information technology, insurance and healthcare would account for 30 to 40 percent of the ESG oriented business market shares in India.
Government of India for further promoting ESG investing and achieving net zero future by 2070, in its Union Budget 2025-2026, has embraced principles of ESG. National Manufacturing Mission has been introduced to support EV batteries and grid-scale batteries etc. For providing agricultural support to the farmers PM Dhan-Dhaanya Krishi Yojana for 1.7 crore farmers across 100 low-productivity districts has been introduced and various healthcare expansion programmes have been introduced among others.
India is performing well at the global level as well, according to a report by Global Sustainable Investment Alliance, 41 international ESG funds have invested an average of 25% of their investible funds in Indian equities. For fulfilling its responsibilities as a global leader, Indian market regulator SEBI, has been maintaining a strict stance mandating all the entities into fulfilling ESG requirements. In 2024, India made a breakthrough by achieving its US $1 trillion in cumulative foreign investment since April 2000. Investors planning to invest in India would be required to align to the robust ESG framework being followed in the country.
Focusing on the global trend, it is to be noted that India holds a high position in ESG disclosures as compared to other economies in the world. 50% of the top Indian listed companies have made disclosures post the BRSR amendment, and the numbers keep on increasing at an impressive rate. Even though having a different energy security status and separate socio-economic conditions than other developed countries in the world, India is moving ahead at a commendable pace. At this rate, India could be the next trend setter in the global ESG terrain. India's pledge for Net Zero by 2070 and its involvement in international treaty like the Paris Agreement, is expected to drive faster adoption of ESG regulations.
These initiatives taken by the authorities, along with the performance of the entities have made India a favourable destination for ESG investment globally.
Rise of ESG themed AIFs in India
Alternative Investment Funds ("AIFs") are privately pooled investment vehicle that invest in alternative asset classes of securities, such as venture capital, private equity, and hedge funds etc. It is distinct from other investment options like mutual funds, fixed deposits or equities. AIFs are governed by SEBI (Alternative Investment Funds) Regulations, 2012. In the recent trends, due to the growing importance of ESG investing globally, it has been observed that more preference is being given to the ESG themed AIFs for investments by the Investment Managers.
India is increasingly emerging as a destination for launching AIFs, focusing not only on financial profits but on ethical and sustainable investing as well. To further cement India's position, there is a dire need for separate regulatory guidelines akin to mutual funds guidelines for efficient functioning of ESG focused AIFs. These guidelines will truly mark an upward trajectory for ESG investing in India.
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