ESG. How global investors can leverage India’s ESG promise

With the outbreak of the COVID-19 pandemic the world is now traversing more uncertainties than ever. The focus now, and rightly so, is on building sustainable and resilient business models to survive in the long run. Businesses worldwide have been working toward making a meaningful contribution to the battle against climate change through initiatives planned under Corporate Social Responsibility (CSR). However, for better ROIs, which also ensure a better impact on the climate, they are now increasingly investing in environmental, social and governance (ESG) investing.

Globally, several ESG funds have delivered strong performance especially over the last one year, and India seems to be scaling up investment opportunities in this regard. Economic participants across the spectrum in India – government, businesses, regulatory bodies, asset managers – are acknowledging, and positively acting upon, the ESG risks and opportunities to focus on ‘real change’.

India’s unique positioning in the global ESG journey

Standing at the forefront of the global fight against climate change, India is the only G20 country on track to meet the 2-degree goal set under the Paris Agreement. India is a relatively low per capita emitter of CO2 (1.84 metric tons as of 2017 vs. US at 16.16 and China at 6.86) to begin with. Hence, India’s targets are about pivoting to green energy in a big way. India is on track to delivering on her Paris Climate targets to increase the share of non-fossil-based energy resources to 40% of installed electric power capacity by 2030. India has witnessed the fastest growth in renewable energy capacity among all large economies with 22 GW capacity sanctioned at renewable energy auctions in 2020.

As a country India is in a unique position as its climate targets are 2ᵒC compatible. This is rare indeed as US, China and EU are on pathways to 4ᵒC+, < 4ᵒC and <3ᵒC respectively.

Several top Indian conglomerates and companies are taking a lead in announcing net-zero targets and raising ESG-linked funds. Recently, a large agrochemicals company became the first Indian company to raise a sustainability-linked loan to tap into a pool of global capital pouring into companies that care about ESG. With regards to investments, India became the second-largest market globally for green bonds with $10.3 billion worth of transactions in the first half of 2019. A spate of ESG funds have also been launched by asset managers in recent months with AuM totaling around INR 105 Bn as of May 2021. Riding on these trends, there is significant opportunity for global investors to benefit from India’s ESG efforts.

Role of global investors in accelerating ESGs in India

Globally, the world’s largest investors are taking significant leaps towards accelerating the ESG journey. In January 2021, some of these investors committed to setting and reporting their own 2025 decarbonization targets to ensure a transition to net-zero emissions by 2050. Asset owners are at the top of the financial systems and establishing visible targets for engagement with asset managers, corporates, industry groups and policymakers marks a bold step. Furthermore, the pioneering Net-Zero Insurance Alliance (NZIA) is the largest collaboration between the UN and the global insurance industry, and the members are signatories UN Environment Program’s PSI Initiative. Set to be launched at the 2021 UN Climate Change Conference in Glasgow this November (COP26), the coalition aims to bring together several finance-related net zero initiatives under one strategic roof, including the Asset Owner Alliance and the NZIA. The driving rationale behind the initiative being that insurers and reinsurers can be effective contributors as they can identify and develop a systematic approach to manage ESG risks and opportunities as part of their business strategy and through their financial products and services.

Both the initiatives clearly demonstrate ambition and the will to make capitalism sustainable. Such an ambition makes conscious investors well-poised to lead India’s ESG journey by helping its business ecosystem sharpen sustainability practices to create greater transparency, accountability and impact.

Outlining below a few critical steps investors can lead take to integrate ESG concerns into underwriting, investment and asset management activities. These would help Indian companies to further evolve their position on the critical front of ESG in the short-term.

Establish an unbiased and transparent scoring mechanism in collaboration with external parties’ involvement like NGO dialogue partners.

Encourage active ownership in addressing ESG risks among investee companies and engage with them to issue transparent, rigorous and realistic targets, and commit to report against them in the near term.

Make sure to identify and engage with investee companies or asset managers falling below threshold level in a systematic, goal-oriented and time-limited process to help improve their ESG performance.

Enable access to investments to companies that clear a robust ESG referral process and sensitive business guidelines.

A bright future for green investors

India, as a high-impact emerging market with a population of 1.36 Bn is on the cusp of rapid development. This presents an immense opportunity for long-term investors not just in terms of returns but also ‘impact’. A holistic climate and broader SGD driven ESG approach is need of the hour. As more and more investors adopt such strategies and their impact is made tangible, we will see India become a rising star for ESG investors. This is an exciting journey that we have only just begun!

The author is CEO & CIO Asia - Allianz Investment Management Singapore Pte Ltd. and India Advisor to Allianz SE Board

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