The beginning of every new year brings an opportunity to reflect, review and revise our actions and goals. 2022 has been a volatile year with geopolitical tension, rising oil prices, inflation, and interest rates. Discussions on lessons from the pandemic have been innumerable this year. One essential learning we all have is not to take anything for granted, whether life or our planet earth.

 

Climate change is the most powerful story of our times. Current CO2 levels in the environment are 400 PPM, which must be mitigated and managed because they contribute to global warming. Presently, global CO2 Emissions are 47.5 billion tons per year, and at this rate, the earth will become non-livable.

 

 

The growing concern about climate change and its impact on society has triggered a new investment conversation. With growing demand by regulatory bodies and other public observers, investors have started incorporating concerns about these issues.

 

And with this in mind, investors have realized that investing can help achieve goals beyond monetary returns. While an investor’s focus should always be on getting the best possible performance, more and more people also want their money to reward companies that positively impact the environment and society. Not only this but there is a growing recognition that ESG factors are economically material, especially in the long term. Investors have started to recognize that ESG factors like climate change have a real long-term impact on the value of their investments

 

Sustainability is considered an opportunity for businesses to reduce risk and save costs over the longer term, which will become imperative to continue attracting quality investors.

 

Sustainable investment opportunities are everywhere now, and wise investors are cashing in on the waves of renewables and sustainability because there is significant profit potential.

 

Terms like Sustainable investing, ESG investing, Impact investing, and green bonds are now a part of financial terminology.

 

Simply put, sustainable investment is an investment that solves the present problems or challenges without jeopardizing future needs. It is all about discovering better ways of doing business that will benefit corporations and citizens both now and in the future. This concept, though now in vogue, is a 100-year-old concept. In 1950, The Pioneer Group, US, became the first fund house to screen the so-called “sin-stocks” – tobacco, alcohol, and gambling from their portfolios.

 

Likewise, under Socially-responsible Investing, the underlying principle is to avoid investments in specific stocks or industries through negative screening according to defined ethical guidelines. Impact investing involves investing in projects or companies actively working to bring positive social or environmental change.

 

ESG investing is becoming indispensable. The environmental factors in ESG refer to the company’s toxic gas emission control measures, consumption of energies (renewable energies, to be specific), water and waste management, and other factors which can positively impact the environment. The Social factors include the well-being of the employees and the staff, society as a whole, and local communities. Finally, the governance factors refer to the ethical standards followed by the firms, their management involvement, transparency of financial data and tax information, board members and their diversity, and others.

 

This year, we have seen the impact of heat waves in several European nations. We also witness incidents like the Deepwater Horizon oil spill, Volkswagen’s breaching ecological norms, and Facebook’s data privacy disclosure. These are signs of things to come if we refuse to act. Although we may have diverse solutions to these issues, businesses must at least adhere to some minimum standards. It is crucial for us, the planet, and future generations.

 

 

International investors with assets of $43 trillion have vowed to reduce the carbon footprint of their portfolios. According to a Bloomberg study, sustainable investing has gone mainstream, with an estimated $37.8 trillion in assets under management in FY2022. According to the same research, global ESG assets will exceed $53 trillion by FY2025. There has been an increase of 88% in investment in ESG funds globally, in which Europe made 80% of the contribution.

 

The Benori report states that sustainable investments account for one-third of assets under management (AUM) in the United States and 36% globally. However, the Indian sustainable investment space only makes up 10-15% of AUM by private equity (PE) and venture capital (VC) firms. It estimates that sustainable investments would make up 40% of AUM by Indian PE and VC firms.

 

The sovereign green bond market has grown exponentially, from issuing as little over $11 billion in 2013 to about $568 billion in 2021. Cumulatively, the total market has surpassed $1 trillion. More than 25 countries have issued green bonds since 2013. These green bonds raise money from the market to finance projects that only have environmental or climate benefits.

 

 

The Indian government is making a debut by issuing Rs 16,000 crore worth of green bonds by March 2023 through issuing sovereign green bonds (the first auction is on 25 January and 9 February). While the Indian government has joined late, our private companies have been pretty active, having already raised $26 billion through corporate green bond issues. Foreign portfolio investors are eyeing our green bonds since they have a dedicated environmental, social, and governance (ESG) framework.

 

Moreover, the Indian government is taking many steps to achieve its objectives. In August 2022, Energy Conservation Amendment Bill 2022 was tabled to amend the Energy Conservation Act 2001, empowering the central government to specify a carbon credit trading scheme. India requires an annual investment of USD 0.6 trillion (Impact Investors Council (IIC) 2020) to meet its UN Sustainable Development Goals. According to the International Energy Agency, India requires $1.4 trillion over the next 20 years in financing green energy tech alone. Just India’s electric vehicle transition offers an investment opportunity of $177 billion and a sales opportunity of $206 billion by 2030.

 

Increasing reform measures include several voluntary and mandatory guidelines to drive ethical corporate behavior and reporting on material ESG factors. SEBI has also come forward and provided a mandate to the top 1000 companies (listed) to come up with an annual report on Business responsibility and sustainability, voluntary for the financial year 2022. However, it is mandatory from FY 2023, which will eventually help the fund houses to evaluate the companies on different ESG metrics and select the best out of the lot. They will force large Indian companies to take a holistic view of sustainability.

 

ESG Investments in India, though at a nascent stage, are evolving fast. The possible reasons behind this encouraging trend could be the growing consumer demand for socially responsible brand behavior, government policies, and the massive growth of cleantech and green initiatives in recent years. The current thrust on climate change and upscaling green energy investments highlights the country’s focus on and need for ESG investments. The global commitments made by the government are clear indications of its focus.

 

Numerous developments and measures have led to the growth of ESG investing in India. In recent years, quite a few indices (S&P BSE Greenex, S&P BSE Carbonex, S&P BSE 100 ESG Index, NIFTY 100 ESG Index, NIFTY 100 Enhanced ESG Index ) have come up to track, monitor, and measure the ESG performance of various companies. India’s Socially Responsible Investment (SRI) asset base stands at USD 28 billion, 0.1 percent of the global SRI assets.

 

For having a better future, ESG investing is crucial. Investing in companies making an effort to reduce their carbon footprint and taking care of the well-being of the employees and society has been identified as a way for sustainability as the number of investors and investments is quickly growing, suggesting that ESG funds are here to stay. With more companies becoming aware of the benefits of sustainability, fund houses will have more options to invest.

 

Without investors, companies cannot survive. Thus if investors become aware of the benefit and need for sustainable investing, companies are bound to follow the same. However, investors want to see their investments grow. ESG investment is one of the most lucrative investment options as it offers an opportunity to screen for better business fundamentals.

 

The ESG investing approaches range from a simple exclusionary screen based on norms or values (exclusions-based screening) to an ESG integration process, where ESG considerations are applied to the fundamental cash flow analysis or security selection.

 

Companies increasingly derive value from intangible assets not captured in their balance sheets, like their people, use of natural capital, and reputation. Therefore analysts are well-served by analyzing the non-financial information captured by the ESG factors, not only to improve their fundamental analysis but also to assess the companies on risk dimensions. Companies with poor governance or failing to consider environmental and social impacts are unlikely to prosper over the long term. Funds that do not consider ESG factors are not fulfilling their fiduciary duty towards investors.

 

Investor interest in ESG investing has been increasing in recent years. According to the 2020 CFA Institute Trust Survey conducted across 15 major markets, including India, only 19% of institutional investors and 10% of retail investors currently invest in products that incorporate environmental, social, and governance (ESG) factors. But 76% of institutional and 69% of retail investors expressed interest in ESG. Another study by Standard Chartered, The Wealth Expectancy Report 2022, has found. Fifty-two percent of global investors expect to increase their sustainable investments in 2023, compared to 64 percent in India.

 

To conclude, remember whatever decision we make can impact the environment, either as a person or as a business. It may not show now, but we will live with the repercussions in a few years. Let us pledge to build, exhibit and inculcate good financial habits.

 

Specifically, in the context of Indian Sovereign green bonds, an individual retail investor may be better off with a ‘wait and watch’ strategy, owing to uncertainty concerning tax incentives and expectation of a lower interest rate offered.

 

On the auspicious festive occasion, aim to harvest the benefits of your investments. Focus on harvesting long-term happiness by selecting the investment avenues that can generate inflation-adjusted higher returns for growing your wealth over time.

 

Anything we do is to save “us,” not the planet. Because however hot the earth gets, it’ll continue in its orbit around the sun.

 

Best Regards
 
Ms. Tarunika Jain Agarwal Ph.D. 

 

Alpha Research