India is charting a very different economic growth trajectory. A unique mix of tradition and modernity has equipped India to take confident strides toward becoming a developed economy. Our journey, as we look to celebrate 100 years of independence in 2047, is that of an Amrit-Kaal, an era of sustained progress and prosperity.

Yes, there are and will be challenges and climate change is one of them. Countries around the world have been responding to these issues. It is almost two decades since a UN-led group of thinkers coined the term ESG. Over the years, environmental, social, and governance (ESG) aspects of investments have become increasingly mainstream. Businesses and economies are realigning themselves now to a responsible development model. There is a good consensus that sustainability is not merely an option but a fundamental necessity for the well-being of our planet and future generations. ESG thinking has helped decision-makers to look at human activity through a diverse set of lenses. The focus is slowly shifting from short-term gains to long-term returns. Close alignment with environmental and social needs is certain to help build a sustainable future.

As we strive towards building prosperity for a new India, we must seek guidance from our time-tested convictions. There is a need to choose wisely and respond to the environment’s warnings and needs. At HDFC AMC, we are mindful of the risk burden that the ecosystem has and of our responsibility towards our clients, society, and the environment. Our ESG mission is to create sustainable wealth for every stakeholder by focusing on the three P’s—People, Planet & Prosperity. To reaffirm our commitment to responsible investing, we have become signatories to the internationally recognized United Nations-Supported Principles for Responsible Investment (UNPRI).

Fiduciary Duty

ESG for us is beyond the acronym it represents. We believe that as trustees of our clients’ money, we owe a fiduciary duty to our clients and also to the community at large. Our approach is tempered by India’s rich belief systems alongside the latest and best practitioner frameworks, including ESG techniques. The motivation is to strive hard to understand changing patterns, and to harness trends with a focus on long-term returns and risks. We understand that businesses that are run in the best interests of all stakeholders, including the environment, are better positioned to create lasting value for their investors. We recognize that ESG investing frameworks provide rich inputs for practitioners to look beyond short-term financial considerations. An investee business’s environmental footprint, the impact it is creating in communities, and its governance standards are important factors that investors should consider. The financial soundness of a business, without a doubt, is an essential factor. But it is also critical to understand how sustainable and robust the financial profile is. Businesses that are able to think long-term have the foundational launchpad to deliver better risk-adjusted returns. Addressing environmental and social issues positions businesses to gain the trust of their clients, attract and retain top talent, and maintain positive relationships with regulators. In the long run, these businesses can contribute to a more stable and resilient investment portfolio. Companies focusing on the triple bottom line (people, planet, and profits) deliver sustained returns over a long period.

Policy making and India’s Amrit-Kaal

India’s Amrit-Kaal journey to become a developed nation by 2047 is making good progress. Democracy, Demographics, Demand, and Digitization are powering India to take the next big step on the per-capita income ladder. Structural reforms and agile execution, best-in-class physical, virtual, and social infrastructure, and overall improvement in the quality of life are creating a roadmap for robust, sustainable, and inclusive growth. This is unlike China, where the growth model is largely state-driven and environmentally unsustainable. India’s policy thrust for equitable and sustainable growth is driven by entrepreneurship with the Government acting as a facilitator. Safeguards to avoid pollution and social tensions are important policy objectives.

“Structural reforms and agile execution, best-in-class physical, virtual, and social infrastructure, and overall improvement in the quality of life are creating a roadmap for robust, sustainable, and inclusive growth.”

Policymakers in India are aware of the inevitable risks that economic growth brings. Regulators are mandating as well as nudging stakeholders to adopt sustainable business practices. Capital markets regulator, SEBI (Securities and Exchange Board of India), is gradually raising the bar for listed companies’ ESG disclosures. This is a significant step forward. The regulator has specified a glide path for listed companies for core business responsibility and sustainability reporting (BRSR). SEBI’s approach is holistic with a focus on the Disclosures-Rating-Investing trinity. The proposed roadmap for enhanced BRSR disclosures including assurance with a glide path approach is aimed at addressing the need for relevant, credible, and comparable data while keeping in mind the cost of compliance. BRSR disclosures will help investors in making informed decisions. Importantly, the policy thrust will make businesses reconsider their commercial activities and the synergies as well as risks these activities have vis-à-vis the environment and the communities these businesses operate in.

As a country, India has a well-deliberated pathway for addressing climate issues. At the 2021 Conference of Parties meeting on Climate Change in Glasgow (COP26), India pledged to achieve net zero emissions by 2070 as a part of its Panchamrit Action Plan and Lifestyle for Environment movement. Last year, at the COP 27 summit in Egypt, India unveiled a plan for meeting decarbonization goals.

Responsible Investing

Large institutional investors like us have a critical responsibility in helping chart a sustainable future. As a commitment towards “responsible investing”, we have furthered the definition of ESG to include Engagement, Stewardship, and ‘Good to Great’ factors. Voting goes hand in hand with engagement. Although India has a robust capital market, the current stage of economic development requires a judicious balancing of choices. Voting with one’s feet is not always a prudent option. Instead, engagement with companies is likely to create a better outcome for all stakeholders. As a part of our engagement policy, we work closely with investee companies to share our views on a variety of issues, including executive compensation, dividend distribution policies, capital allocation, and related party transactions. We also engage with investee companies to focus on environmental sustainability. In line with the regulatory requirements, we have adopted the stewardship code. We view stewardship as an important step towards improved corporate governance in our investee companies and improving the interests of investors. Rules now make it mandatory to vote on important company resolutions. We consider shareholder voting to be an important shareholder right and a valuable tool for decision-making. Our investment team endeavors to vote in an informed and pragmatic manner.

“We must look beyond the three words that ESG stands for. We should strive hard to recognize the intertwined nature of risk and sustainability.”

Identifying businesses that have the potential to achieve ‘Good to Great’ corporate transformations is important for us. The opportunity here is to play the role of an active partner in a business’s journey through highly constructive engagement and stewardship.

Conclusion

India’s ascent to being the world’s third-largest economy in the next decade is promising. But not only must we learn from history, we must also recalibrate the ever-changing nature of risks that could jeopardize our clients’ interests. As investors, our role is crucial; we must make informed decisions, work with companies to adopt responsible practices, and acknowledge the synergies between business, the environment, and society. Investors too need to see if companies are aligning their operations and offerings for creating sustainable value. We must look beyond the three words that ESG stands for. We should strive hard to recognize the intertwined nature of risk and sustainability. This understanding will propel us toward creating an equitable, prosperous, and resilient future.

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Author may be reached at: eboard@icai.in