Sustainable Investing- The new paradigm for India’s investment landscape

By Shivani Kalbande, Junior Analyst, Distributed Energy

As people and corporations around the globe navigate through multiple crises rendered by the ongoing pandemic conditions and economic slowdown, sustainable investing is gaining momentum to slowly emerge as an important trend in climate positivity. Sustainable investing is largely based on Environmental, Social, and Governance (ESG) standards, also known as ESG investing. ESG investing strategies are mainly focused on the following points-

A healthy ESG practice helps an investor to maintain good credibility or reputation. Impressed by the merits of sustainable funds, investors are investing for the long term and are more willing to ignore interim periods of bad performance. The rapid growth of sustainable investing is driven by increasing awareness and people’s socially-conscious choices for their investments.

Though sustainable investing started in Europe, it has spread its wings in Asia as well. India is beginning to witness some action in this space. According to India’s own estimates, the country needs to invest around USD 450 billion a year over the next 10 years to meet its urban sustainability and renewable energy targets, which includes USD 30 billion a year on energy. Asset management is factored in the ESG lens while making investment decisions across their actively managed strategies. A few asset management companies have launched dedicated ESG funds while others are in different stages of planning their launch. According to a report published by financial services Major Morningstar, sustainable funds in India have brought in more than USD 500 million (over ₹3,700 crore) during the COVID-19 crisis, largely due to growing investor interest in ESG issues.

Following are some reasons for the growth of ESG Investments in India-

• India has committed to achieving the Sustainable Development Goals to drive its agenda of development without destruction to the environment. The International Finance Corporation (IFC) in its report ‘Climate Investment Opportunities in South Asia’ has estimated an investment opportunity of USD 3.1 trillion in India.
• Global ESG funds are investing in India and as per Global Sustainable Investment Alliance (GSIA).  41 Global ESG funds have invested an average of 25% of their funds in Indian equities.
• Earlier, domestic investors played a limited role in sustainable investments. However, the trend is changing and many local ESG funds are being launched in the Indian market.
• In India, various sustainability-oriented indices i.e. S&P BSE 100 ESG Index, NIFTY 100 Enhanced ESG Index, etc are being used to track, monitor, assess, and report sustainable performance of companies.
• India is focusing on policy reforms to drive investments in emerging sectors like renewable energy. This is leading to the development of companies like Distributed Energy which offers potential investment platforms for renewable energy resources like solar.

Climate change is fast outpacing us and needs immediate action. Sustainable investing is one such way to address the crisis. Despite India’s steps towards promoting sustainable investing, challenges such as the mindset of investors & asset managers to focus on maximization of returns, lack of market standards, lack of track record of ESG funds and less technical capacities limit the growth of sustainable investments. Indian investors need to play a big role to drive this change and drive companies to ensure climate change is front and center in their business decisions.