Environment, social responsibility, and corporate governance (ESG) have emerged as key themes for investing in India. ESG funds’s asset size has grown nearly five times to Rs 12,300 crore over the last few years. Earlier, the National Stock Exchange (NSE) launched NSE Prime, a framework that allows companies to submit to standards of their governance that are higher than those required by existing regulations. Financial Express Online caught up with Akanksha Sharma, ESG & Policy Expert and Author of “For the Greater Common Good” to know her views on ESG and related issues. Excerpts:
Today, investors are extremely sensitive about ESG. How does ESG aid in creating shared value?
ESG involves a synergistic approach to ensuring environmental, social and governance aspects of a business are driven from the top in alignment with a company’s core business. This ensures business operations, partners across the value chain, investors and communities benefit from green operations, CSR and other such efforts. In other words, ESG is a conscious investment in the future of the company, society, and the planet. Embracing clean energy, water efficiency, waste management and others are not just measures for a better environment but translate into multi-fold benefits of cost savings, circularity, effective stakeholder management, and more investments.
How are Climate risks linked with ESG?
Climate change is an existential threat. However, in more than one way, Asia is the frontline of the changing climate affecting the environment, as well as people; increasing displacement, poverty and inequality. On one hand coastal cities are exposed to floods and typhoon risks, heat and humidity, while on the other hand some face droughts. I believe we need to adapt to neo mindsets to diagnose climate risks, protect people by reinforcing infrastructure; building green and gray defenses, such as restoring natural ecosystems; disaster relief shelters and so on. Also, community resilience can be enhanced by the decentralization of resources ensuring access to finance and insurance products will help maintain the subtle balance between sustaining economic growth and responding to climate change.
What are the top trends and risks on ESG in Asia?
According to the MSCI 2021 Global Institutional Investor Survey, around 79% of investors in Asia-Pacific have augmented the ESG exposure of their investments due to Covid-19.
Currently, ESG maturity across Asia differs with some countries ahead of others. However, in addition to robust regulatory developments, the ESG landscape in Asia is being brought up the speed at par with global standards through ESG risk management guidelines, steering committees, and cross-collaborations among industry players. Investor sentiments especially those from US and Europe; and activism have also been a motive force behind this change.
The increasing interest in ESG across Asia is interspersed with pertinent investor concerns that many companies face imminent risks. Physical climate risk aggravated by extreme weather events and the pandemic have posed a challenge for entities that are already capital crunched. In response, they have postponed capital expenditure and reduced headcounts, triggering concerns of adverse health and safety outcomes and reputational risk as factors like growing Scope 2 GHG emissions, human-rights issues, fair-labor standards, and diversity among others still exist in Asia.
What are the challenges from ESG lenses in India and how can they be resolved?
Despite its success globally, there are innumerable challenges when undertaking ESG efforts and that mark India’s ESG investment landscape. The high borrowing cost for green bonds in comparison is one example.
The information gap in India is also huge. We lack a standardized system for tracking ESG metrics. Additionally, incidents of greenwashing, diverting ESG investment proceeds into projects that are harmful to society and the environment while shown to be eco-friendly are rampant. This is where there is a need for regulations that curb such misuse of ESG funds.
However, despite these challenges, ESG is a necessity considering issues like climate change, poverty, human-rights violations and others are all very real. The BRSR and the notion of a Social Stock Exchange will undeniably help standardize reporting and boost the ESG investment space in India. The amendments to the CSR law last year too will bring in more transparency, increased focus on sustainable impact and innovation.
Overall, the ESG movement needs to be paced up through collaboration between stakeholders to build sustainable and scalable solutions to solve some of the world’s most pertinent issues.
How do you see these changes helping the ESG space evolve in the near future?
The BRSR is expected to strengthen ESG reporting in India as well as bring in more clearness and practical comparison across companies and sectors. It will enable corporates to look beyond just financial performance and recognize the potential socio-environmentally compliant business practices hold.
Being ESG compliant reassures stakeholders of sustainable returns on investment in addition to creating efficiencies for the corporates themselves. And the importance of ESG performance and related instruments such as green or social bonds, sustainability-linked bonds, and others are only going to grow. Around $120 billion poured into sustainable investments in 2021.
And especially now, when the pandemic has disproportionately impacted social norms and increased socio-economic disparities, the demand for businesses to be responsible is greater than ever. Companies need to define their ESG purpose and use it as a guide which will bring in better reputation, risk mitigation, boosted business performance and industry leadership. Top leadership and the Board have the moral duty to help entrench ESG into a company’s strategies, culture, and so on, ultimately influencing decision-making across functions and its value chain.