Future Of Sustainable Investment In India
There is a growing recognition that ESG factors are economically material, especially in the long term
Sustainable investing is about balancing financial considerations without compromising short-term and long-term goals, stakeholder interests, and fair outcomes for everyone. In many ways, we are moving from sustainable investing as an idea to a reality that has implications for all investment portfolios.
A report by Benori Knowledge revealed that sustainable investments by Indian PE and VC firms are expected to grow to $125 billion by 2026. Factors driving this growth are consumer demand for socially responsible brand behaviour, government policies, and the immense growth of cleantech and green initiatives.
There is a growing recognition that ESG factors are economically material, especially in the long term.
Data by the AMFI (Association of Mutual Funds in India) revealed that combined assets under management (AUM) of existing ESG (Environment, Social and Governance) of existing funds in India were INR 9,516 crore in December 2020. ESG investing is gaining growing acceptance from investors, over the past years due to policy reforms and awareness.
ESG & the startup ecosystem
ESG investing is still an evolving area in India and it can be considered from the following aspects:
Business model: While many businesses and regulatory aspects are promoting businesses that have sustainability as the underlying idea and investors are buying into the sustainable investing through investing in such businesses, these have to be considered from a long-term perspective. For instance:
Adoption of EV: While the companies are focusing on adopting EV as a move towards sustainability and the EV start-ups are also getting traction. However, we do need to consider that the majority of the power generated in India are through fossil fuels. So, one must think, is EV really that green? Just because we cannot see the consumption of raw material and emission during the power generation, it does not mean EV are zero emission, it's just the narrative.
Clean technology: Another emerging investment opportunity has been around renewable water technology. Many investors are considering the same as sustainable investing, but in the longer-term horizon if the technology is adopted on scale it will lead to an ecological imbalance. The rain patterns may be completely disrupted which will impact agriculture, marine life, climate and groundwater recharge.
Thus, when it comes to 'sustainable investing' there are no fixed criteria. One can consider the supply chain while others look at the entire value chain.
In our opinion, one must look at the wider perspective in terms of the value chain, long-term impact and application at scale. Also, one must look at the part where one component of ESG must not negatively impact adversely the other component, for instance in the pursuit of environmental sustainability one must not upset the Social Balance.
Another perspective towards Sustainable Investing is encouraging companies to adopt sustainable practices in their internal operations. If this practice is adopted at scale the entire value chain will start shifting towards sustainability.
While this process is slow and many times the practices are performed in stealth mode, this approach seems to be a more sustainable form of sustainable investing.
As the investors have started asking about the ESG practices prior to investing, founders have started realising that focusing on ESG requires extra effort, check and execution. To further consolidate the practice, investors have started undertaking ESG due diligence.
ESG due diligence is widely adopted by foreign funds and the funds which have international corporations as partners. ESG due diligence has its own challenges, such as:
Lack of quality data: Accurate data about a company's environmental, social, or governance performance is procured from an analyst, a fund manager, or an investor. Other sources of getting this data, such as an organisation's sustainability report, media, conferences, etc., are looked at with caution. Furthermore, finding data is complicated, tedious, inaccurate and expensive.
Lack of market standards: There is also a lack of standardisation in ESG data collection, impact measurement, and reporting, which complicates things.
Lack of regulations and advocacy: ESG investing is slowly becoming popular with companies, but there's still insufficient advocacy. There is no permanent policy on ESG either globally or in the country.
The way forward
The idea of profitability and ESG don't always align due to the limitation of the current infrastructure.
Despite the challenges, the future of sustainable investing in India looks bright, with more and more investors, shareholders, employees, clients, and regulators clamouring for greater transparency in the system. To ensure this, businesses and investors must focus on integrating environmental, social, and governance (ESG) factors into their investment decision-making processes. This will make them more sustainable and help them mitigate risks and take advantage of opportunities in the long run. It will also help them build a better reputation and attract more investors.