Emerging Landscape of ESG Investments in India
A Sekar
Corporate Law Expert | a.sekar.cs@gmail.com
Dr. Ranjith Krishnan
Head, Academic Program Unit, NISM | eboard@icai.in
“The greatest threat to our planet is the belief that someone else will save it”
“A buoyant stock exchange is the barometer of a country’s growth sentiments. As a part of the capital market, the stock exchange caters to all kinds of investors who apart from their motivation for financial returns are also looking at long term sustainability. This is where non-financial aspects of the investments become important and these days the theme of ESG investing is fast catching the attention of not just institutional investors but also the average retail investor who is also looking at investing for long term sustainability. The article gives a basic overview of the subject including the recent regulatory changes in the disclosure regime prescribed by SEBI for listed entities with respect to ESG parameters and looks at the potential opportunity for the Chartered Accountants.”
ESG – An Overview
Three powerful words make up ESG namely “Environment (E)”, “Social (S)” and “Governance (G)”. The concept of ESG globally is a natural result arising out of the shift of emphasis from “shareholders” to “stakeholders”. It has changed the way investors and fund managers globally as well as in India evaluate and decide upon investments focussing more on long term sustainability, which is the essence of ESG.
Nowadays, non-financial metrics in the form of ESG are also given due weightage by the investors in addition to the financial metrics. Thus, ESG has evolved into a proactive framework integrating the three pillars (ESG) with the objective of maximising stakeholder well-being instead of just the shareholder well-being which the financial metrics considers. It is when the financial and non-financial metrics of ESG are connected as well as integrated and embedded with focus on Strategy and Sustainability, they become even more powerful.
Analysing the Three Pillars of ESG Individually
🌿 1. Environmental Pillar
Refers to the environmental impacts that an entity creates through its functions, operations and activities along with the risk management practices followed by it. Examples are direct as well as indirect Greenhouse Gas (GHG) emissions, the way natural resources are utilised by the entity, and the ability of the entity to absorb various environmental risks such as Climate Change, fires, flooding, pollution, etc.
🤝 2. Social Pillar
Refers to the relationship of the entity with stakeholders including interactions with communities, value chain partners, respecting the supremacy of human rights, well-being of its employees, occupational health and safety, and gender equality.
⚖️ 3. Governance Pillar
Refers to how an entity is led, managed, and controlled, including alignment to stakeholder expectations, board composition, diversity, board processes, anti-corruption safeguards, and the effectiveness of internal controls that promote transparency and accountability at the highest level of management.
Snapshot of Scope and Key Concerns Across ESG Pillars
| Environmental (E) | Social (S) | Governance (G) |
|---|---|---|
| Greenhouse Gas (GHG) Emissions, Air/Water Pollution | Social Well-Being, Health, Security and Safety | Business Ethics and Ethical Standards |
| Climate Change | Working Conditions | Composition of Board, Board Process, Diversity and Governance |
| Water Management | Employee benefits | Structures of Board Committees |
| Recycling Process | Gender Diversity and Inclusion | Risk Management Systems |
| Deforestation | Respect for Human Rights | Stakeholder engagement |
| Emergency Preparedness and Disaster Management | Impact on Local communities | Anti-Corruption and Anti-Bribery policies |
ESG Maturity & Conceptual Progression
Every business entity interested in travelling the path of excellence with focus on sustainability will have to carry out a self-assessment as to where they stand regarding ESG Maturity. This calls for steps towards better integration of ESG parameters and Key Performance Indicators (KPIs) with the strategic management process, risk management systems, corporate culture and governance systems to lead the entity towards long-term sustainability. Based on such a self-assessment, with external help from ESG professionals wherever required, a business entity would be in a better position to determine the stage of its maturity level with respect to ESG.
| Stage | Maturity Level | Brief Description |
|---|---|---|
| 1 | Entry level maturity | ESG is regarded as an inevitable responsibility and merely a compliance requirement. Most large organisations are expected to have crossed this stage. |
| 2 | Slightly more sustained and shared process | Some importance is given to ESG metrics wherever considered useful but not a great deal important strategically. Due importance is given to sustainability risk to the extent that impacts the “Going Concern”, but not all key ESG metrics. |
| 3 | Strategic Agenda | Management starts appreciating the strategic importance of proper mapping of the primary ESG-related interests and priorities of the entity’s stakeholders against those of the business and the related stakeholders. Due emphasis is given for analysing those ESG metrics, which if not well managed, will negatively impact the enterprise value of the entity. |
| 4 | Brand Building | The entity has established appropriate documentation demonstrating a good understanding of where they need to strategize with respect to leading in addressing the ESG perspectives of all stakeholders. These are followed rigorously with the conscious objective of brand building. |
| 5 | Leadership Position | The business leads the ESG agenda in the industry or even across industries. They set trends and have established processes that integrate the financial and non-financial reporting using ESG related KPIs that are also updated from time to time. |
Each stage above represents a progression from one level of maturity to the next higher level of maturity. The level of maturity with respect to ESG directly as well as positively influences the ESG ratings, which in turn enhances the reputation of the business to be perceived as more sustainable than it would have been otherwise.
ESG Investing Dynamics & Economic Stakes
Typically, every rational investor be it Institutional Investor, HNI Investor or Retail Investor carries out a comprehensive analysis of a company’s performance across various parameters and seeks to achieve a diversified and balanced portfolio. In doing so, the current tendency of investors is to give due weightage to long term sustainability of their investments as they seek to pursue their goal of maximising financial returns. However, over the last two decades, the concept of “Sustainability” has evolved with increasing importance being given to environmental and social aspects. And this is where “ESG Investing” bringing into a single umbrella concepts like “Sustainable Investing”, “Responsible Investing”, “Impact Investing” or “Socially Responsible Investing” (SRI) comes in, wherein investors prefer investments which duly addresses the concerns of Society and Environment in addition to financial returns.
⚠️ Ecological Disaster Wake-Up Call: Brahmapuram Fire (March 2, 2023)
A very recent eye opener is the fire at Brahmapuram in Kochi in the State of Kerala on March 02, 2023 as a result of which a large part of the city got gutted by toxic waste. Though reportedly, the fire has been contained, environmental experts have opined that the environmental and social consequences of this fire incident may remain for many years to follow. These and similar catastrophes are a constant reminder that due attention and highest priority must be accorded for environmental and social issues with zero-tolerance.
ESG Ratings vs. Credit Ratings: A Vital Distinction
According to CRISIL Sustainability Year Book 2022, ESG Ratings is a relative evaluation and assessment of an entity’s exposure and capacity to manage, mitigate or absorb risks related to ESG as well as convert such exposures to opportunities. Globally, the requirements for ESG ratings are driven by the need of investors looking to make ESG related investments. These investors are guided by models that have the capacity to pinpoint areas in the management of the entity that can have an adverse impact on its performance arising out of its ESG exposure.
Key Distinction: ESG Rating ≠ Credit Rating
- Credit Rating: Measures the creditworthiness of a borrower or specific debt instrument (ability and willingness to make timely debt service payments).
- ESG Rating: Evaluates the company’s enterprise exposure to long-term environmental, social, and governance risks and strategic mitigation capacity.
- Independence of Ratings: A high ESG rating does not necessarily result in a high credit rating, and vice versa, even though certain operational and risk-management inputs may overlap.
Globally, the ESG rating industry has been largely unregulated, but regulatory frameworks are rapidly evolving:
- Japan: Financial Service Agency released a draft Code of Conduct in 2022 for ESG Rating and Data Providers.
- United Kingdom: Formed a voluntary group for best practices code with a view to bring providers under the Financial Conduct Authority (FCA).
- India: The Securities and Exchange Board of India (SEBI) issued a public Consultation Paper on the regulation of ESG Rating Providers in February 2023.
ESG Reporting Architecture: From BRR to Mandatory BRSR
Global Reporting Frameworks
- Value Reporting Foundation: Formed in 2021 through the merger of the International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB), evolving 77 industry-specific sustainability standards.
- Global Reporting Initiative (GRI): Guidelines utilized across ~100 countries covering climate, human rights, diversity, and corruption.
- Specialized Boundary Frameworks: Task Force on Climate-Related Financial Disclosures (TCFD), Carbon Disclosure Standards Board (CDSB), Global Real Estate Industry Benchmark (GRESB), and Dow Jones Sustainability Indices.
SEBI’s Regulatory Trajectory in India
One of the governing principles of BRSR is that it serves as “a single comprehensive source of non-financial sustainability information relevant to all business stakeholders – investors, shareholders, regulators, and the public at large.”
BRSR contains more than 100 granular data points across ESG parameters. Reporting mandates a robust internal MIS, deep Board-level involvement, and policy realignment. Notably, more than 175 listed companies voluntarily adopted BRSR ahead of mandate.
The BRSR framework draws upon the National Guidelines on Responsible Business Conduct (NGRBC) issued by the Ministry of Corporate Affairs (MCA), which directly map to the 17 UN Sustainable Development Goals (SDGs) committed to by India and 192 other nations.
G20 Presidency in 2023: India’s Strategic Multilateral Platform
As India assumed the G20 presidency for the year 2023, it secured a unique opportunity to demonstrate leadership in connecting the world’s major developed and emerging economies. G20 members represent 85% of global GDP, 75% of international trade, and two-thirds of the world’s population.
India’s G20 leadership focuses global and domestic attention on inclusive development strategies and capital market modernization. Indian corporates, as imposing regional anchors and global players, hold a vital responsibility to lead the sustainability and ESG transition during this historic presidency.
Section 166(2) Fiduciary Mandate & Role of Chartered Accountants
It is worth noting that Section 166(2) of the Companies Act, 2013 imposes a statutory duty on directors to act in good faith to promote the objects of the company for the benefit of and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment. Failure to comprehensively monitor ESG impacts could be construed as negligence in fiduciary duty.
Integrating non-financial ESG parameters into core portfolio allocation.
Evaluating climate liabilities, greenwashing risks, and supply-chain exposure in M&A.
Benchmarking and auditing corporate ESG data models.
Independent third-party verification of BRSR disclosures.
Though in the PPP model (People, Planet, Profit), Profit is the third priority with People and Planet preceding it, businesses remain hesitant without tangible economic returns. It is here that Chartered Accountants, equipped with rigor in financial and management accounting, bridge the gap by synthesizing financial returns with sustainability outcomes.
The scenario provides an unprecedented opportunity for CAs to shift focus from conventional compliance to Strategic Management and multidisciplinary ESG leadership. Where there is a will, there is a way—and the accounting profession is primed to show the sustainable way.