What’s the ESG outlook like, especially as a phenomenon to uphold or augment a company’s capacity to produce value over the long term by offering good risk-adjusted returns by generating value for all stakeholders? According to Equity Quotient, those companies that proactively embrace stakeholder diversity and ESG principles tend to be more successful with higher stock price impact, revenue, increase in EBITDA & stronger retention. On the other hand, according to Morningstar, funds with the highest sustainability ratings received more investment than the funds with the lowest ratings, but none of those funds outperformed the ones with the lowest ratings in terms of performance. So, what’s the Indian landscape like, when it comes to ESG, especially in the investment space?
According to Bose Varghese, Senior Director – ESG at Cyril Amarchand Mangaldas, “Whether the term ‘ESG’ is used or not, there are some inherent risks, while offering a lot of opportunities, which becomes very important for businesses for their long-term sustainability and success. The ESG terminology was brought in by the investment community and it got a leg up when the biggest PEs started embracing it and pushing it through their investments. Trillions of dollars are invested in ESG assets across the world. And due diligence is finetuned towards finding out risks and weighing them in evaluations and investment decisions; they’re also looking at new innovation and technology spaces that offer huge opportunities. So, while there may be some tremors in the space, fundamentally, they haven’t moved away from ESG considerations. And increasingly, across jurisdictions, there are regulations and so they have more work to do”.
And could what’s happening in the US have a ripple effect in India?
Varghese remarks, “In the US, there’s a counter-push to ESG and it’s deemed to be ‘woke’. This divide for and against ESG is ideologically and politically motivated. There have been pushback and some legal threats, where fund managers using ESG for fiduciary decisions may be retaliated through legal ways”.
“In any transition, there’s reality and there’s chaff, so this will force investors and businesses to focus on what is really important under ESG. There’s a fair amount of LP interest. And fundamentally, the concept of ESG is not going to change, it’s going to gain strength and it hasn’t reached its endpoint yet. I think ESG will win in the end”, adds Varghese.
And what’s happening in the India scene, when it comes to ESG?
Varghese comments, “When it comes to India, ESG is pretty strong. And we have several new regulations coming out and corporations are taking it very seriously. We’re probably looking to be the strongest among leaders globally. ESG is really long-term. If short-term profitability is the target, that’s where the struggle comes from”.
And what’s the deal with greenwashing in India?
Varghese declares, “The greenwashing phenomenon is so rampant in the country, be it companies advertising for products or builders or fund managers or others. The possibility exists, because the tag ‘green’ has a lot of market value”.
“In India, with something like SEBI’s BRSR, there is an attempt to create full transparency and reliability in terms of companies getting rated. Furthermore, SEBI has expressly brought in greenwashing considerations, like mutual funds regulations getting amended in 2023 & in the same year, SEBI has brought out do’s and don’ts for green debt securities”, states Varghese.
So, how does India stand on the global ESG landscape?
Varghese opines, “In the last 2-3 years, India has caught up well and is on par or even ahead of the EU region. Today, we have 2 major pieces of regulation that put us ahead of the rest of the world. India is the first country to provide ESG rating providers. There’s also a reasonable assurance mandate for ESG data, which no other country has”.
“But, our challenge is in the implementation and these are all brand new regulations that haven’t even seen the first cycle of implementation”, quips Varghese.
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