Responsible Investing (RI) is a broad term that includes integration of ESG into the investment process. ESG, an acronym for three buzzwords, namely Environmental, Social and Governance, has become among the key criteria governing the investment decision making process in Europe, Canada, North America, Australia and New Zealand and to some extent in Asia. To give a perspective, as per the Responsible Investment Association, RI assets under management (RI-AUM) stood at C$3.2 trillion as on December 31, 2019, a 48 per cent growth over a two-year period.

India is attracting large Foreign Portfolio Investors (FPI) inflows in the current quarter, with US$7.75 billion in November and with YTD inflow of US$14.2 billion. Going forward, this trend may continue if Indian companies incorporate and integrate ESG parameters into their businesses. This integration needs to be at a fast pace, as Indian companies are still at the nascent stage of adopting these norms, let alone implementing them.

In the second quarter post earnings conference calls, a few large-cap companies mentioned the adoption of ESG in their respective business, which was not a surprise. The FPI flows from Europe and Canada in specific, will influence the Indian companies to incorporate ESG norms in the businesses. Traditional ‘long only’ style of bottom up stock picking is now fast becoming step One in the final investment decision. The step Two is ESG score or to what level ESG has been incorporated in a business. This change in investment process will play a big role in domestic as well as global companies incorporating ESG norms in their businesses at an accelerated pace.

The FPI investors are increasingly being mandated by their own investors as well to incorporate ESG in their investment decision-making criteria. So, Indian companies will have to incorporate ESG norms in their businesses to be on the investing radar of the FPIs.

Climate agreement

Also, India is a signatory to the 2016 Paris Agreement on Climate Change. Joe Biden’s administration taking over as US President in January 2021 and the appointment of John Kerry as the US climate envoy are significant changes in favour of the Paris Agreement, which was signed by John Kerry on behalf of the US in April 2016. India’s adhering to the undertakings at the Paris climate meet will indirectly influence Indian companies to adopt ESG norms at a faster pace.

In November 2020, Prime Minister Modi digitally inaugurated the third Global Renewable Energy Investment meeting and Expo and the main theme of this was Innovations for Sustainable Energy Transition. This is significant given that India’s energy need is currently being met to a big extent by thermal power generation, an environment pollutant. India needs to quickly move away from thermal to alternative energy.

Finally, global companies that are sourcing from Indian companies could also influence these companies to adopt and incorporate ESG in their business processes. Foreign companies are often restricted to buy or source products from companies that do not comply with the norms, standards and parameters as required under the gamut of ESG-compliance. The more willingly and quickly Indian companies adopt ESG, the more beneficial it will be for them.

In conclusion, adoption of ESG parameters may not remain optional for Indian companies; rather, it could become mandatory. The concept of “Total Shareholder Return” is now transforming to “Total Shareholder and Social Return”.

The writer is Head Institutional Business, Reliance Securities

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