‘It’s early days, but India’s ESG ecosystem is growing rapidly’

The lack of regulatory and investor pressure means less scrutiny even for companies in high-emitting sectors such as energy and industry, says Shantanu Srivastava of IEEFA, adding that this is set to change.

Thermal power plants in India.
Thermal power plants in India. The majority of Indian corporates are still tackling their scope 1 and 2 emissions, but there is negligible action on Scope 3, says Shantanu Srivastava is an energy finance analyst with IEEFA’s India team. Image: Global Landscapes ForumCC BY-NC-ND 2.0

The environmental, social and governance (ESG) ecosystem in India is in the early stages of its evolution, with the securities regulator having made it mandatory for the top 1,000 listed companies to furnish sustainability reports from this financial year. India is also one of the few countries in the world to have a corporate social responsibility (CSR) mandate – companies with a net worth of Rs5 billion (US$61 million) or more (or turnover of Rs10 billion or more, or net profit of Rs50 million or more) are required to spend 2 per cent of their net profits on CSR initiatives.

This makes India a major market for sustainability solutions and green finance, and makes it critical to the evolution of the ESG ecosystem worldwide.

To understand the drivers of India’s ESG push, the challenges, and the opportunities for businesses, Eco-Business spoke to Shantanu Srivastava, energy finance analyst with think tank Institute for Energy Economics and Financial Analysis (IEEFA), who covers listed companies in the Indian energy sector, analysing their transition strategy, financing needs and ESG profiles.

Shantanu Srivastava is an energy finance analyst with IEEFA’s India team

Shantanu Srivastava, energy finance analyst, Energy Economics and Financial Analysis. Image: Shantanu Srivastava

How far along are Indian companies on the path to sustainability, to building ESG considerations into their business strategies, and their supply chains? 

Indian companies are fast adopting ESG as part of their overall business strategy. Several companies have started disclosing their ESG profiles and sharing ESG incorporation and improvement roadmaps. A primary motivation has been the presence of a large, global pool of ESG-aligned capital, which stands at upwards of US$120 trillion, going by the assets under management of the signatories of the United Nations’ Principles for Responsible Investing (UN PRI).

Who is leading the ESG push in India? Institutional investors, government, or venture capital investors?

In India, private corporations initiated the first ESG debt issuances and investments – the first green bond issuance was by Yes Bank in 2015 – much before any regulatory developments. As of now, policy development is taking place first, creating a market and an ecosystem, unlike in developed markets where the push for ESG came from institutional investors and the regulatory regimes followed.

Domestic investors do not seem to differentiate between green and non-green debt issuances (or investments), hence a domestic “greenium” is non-existent. The ESG-based mutual funds market is also small in India, though it is growing rapidly. On the corporate side, the compliance with ESG disclosures and incorporation of ESG strategy varies widely across sectors. Several companies in highly polluting sectors such as power generation have some of the best disclosures, presumably to raise capital from global ESG investors and financiers.

Is there pressure from supply chain partners higher up in the value chain?

Supply chain emissions are accounted for under Scope 3 emissions accounting. Many domestic supply chain partners for larger corporates are small or micro enterprises. The consistent, reliable and science-based accounting of scope 3 emissions needs processes, skillsets and tools that these small businesses do not have.

The large majority of Indian corporates are still tackling their scope 1 and 2 emissions and hence there is negligible action on Scope 3. For instance, when JSW Steel, one of the country’s biggest steel producers and exporters, recently issued the first sustainability-linked bond by a steel company globally, its key performance indicators (KPIs) were linked to scope 1 and 2 emissions only.

Beyond the “E” in ESG, social metrics have also not been much in focus for corporate India’s supply chain, partially due to low disclosure requirements in the past.

Is there the same level of scrutiny/distrust of ESG reporting as in other global/regional markets?

No, and this largely stems from the lack of regulatory and investor pressure. Within the country, the level of scrutiny that companies in high-emitting sectors face, such as energy and industry, is not comparable with that faced by companies in, say, the EU.

Is the current mandate largely for self-reporting? Is there an external audit? How big a concern is greenwashing this year, when the reporting mandate kicks in?

The securities regulator Securities and Exchange Board of India’s (SEBI) Business Responsibility and Sustainability Reporting (BRSR) regime, which rolled out in April 2022, is the first step towards mainstreaming mandatory ESG disclosures among listed companies. Initially applicable to the top 1,000 listed companies (by market capitalisation), it is aimed at building capacity. Third-party or external assurance is voluntary at this stage.

There is a lack of guidance on several descriptive responses required as part of the disclosures. Sectoral guidance is also not available, unlike in other leading voluntary standards such as Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD). Even the requirement to disclose the details and methodology used to arrive at the most material ESG issues (through a sustainability materiality assessment) is missing.

While these may raise greenwashing concerns, the intent seems to be to not make ESG disclosures overly burdensome in the initial phase.        

Has there been a perceptible post-pandemic shift in ESG investing and compliance in India?

Globally, ESG investing has picked up materially post the pandemic. When Covid-19 first struck, investors dubbed it the 21st century’s first “sustainability” crisis. According to a survey of global institutional investors by EY, 90 per cent of investors gave greater importance to companies’ ESG performance post the pandemic and 86 per cent said that corporate decarbonisation is key to their investment.

ESG investing from an Indian perspective is still a fringe topic, something that can be gauged by the fact that only 27 investors headquartered in India, of 5,180 in all, have signed up the United Nations Principles of Responsible Investing (UNPRI). Twenty-five of these investors have become signatories post the pandemic, which shows there is some momentum building. 

Is there reliable data on how much capital is invested in businesses with a clear ESG focus in India?

We don’t have exact figures, but capital has poured into several clean energy companies in India, and several conventional utilities have pivoted towards greening their business operations. This capital has come from global assets managers, private equity funds, sovereign wealth funds and pension funds. Besides, there have been mergers and acquisitions such as Adani’s acquisition of SB Energy’s assets and Shell’s acquisition of Sprng Energy. Several stake sales have also taken place, with domestic companies such as JSW Energy, Tata Power, Adani Green and Greenko selling equity to strategic and financial investors.

What about demand for ESG-aligned instruments, such as green bonds, sustainability-linked bonds, social bonds and transition bonds? 

Globally, such demand has boomed. Close to US$1.7 trillion worth of ESG debt was raised globally in the year 2021, as per BNEF.

Indian companies have also seen several notable ESG issuances, primarily in offshore markets. These issuances have been led by green bonds, issued primarily by clean energy companies such as Adani Green, Renew Power and Greenko. In total, Indian companies have raised US$13.7 billion worth of ESG debt in 2021.

Non-energy sector companies’ issuances have also been increasing with the growing prominence of sustainability-linked instruments, the fastest growing segment in the global sustainable finance markets. Industrial sector companies such as JSW Steel, UltraTech Cement and UPL Corp have raised sustainability-linked bonds and loans in the last two years. These are mostly companies that have robust ESG disclosure regimes (they follow global disclosure norms) and that already have experience raising debt in offshore markets.  

Are companies with good ESG performance able to access capital at lower costs? 

The record of “greenium” or premium received by the issuers of ESG labelled bonds globally has been inconsistent. Moreover, greenium estimates have been decreasing lately due to the large number of green issuances hitting the market. Indian corporates that have raised green bonds in the past have done it mostly to refinance older high-cost debt. Thus, they have benefited from lower-cost green debt in the past, but after monetary policy tightening by the United States Federal Reserve and the depreciation of the rupee, no new offshore issuances are taking place.

From a banking perspective, though Indian banks have lent to climate-resilient sectors such as renewable energy generation, there’s no evidence that they got preferential rates due to better ESG profiles.

Several large banks such as State Bank of India, ICICI, HDFC and Axis have all claimed to be working on incorporating ESG practices in their lending and investing decision-making process, but it is still early days for ESG performance garnering a lower cost of debt. However, the Reserve Bank of India’s latest discussion paper on mainstreaming climate risk considerations should nudge Indian banks to start considering climate risk as an important metric in their lending decisions.         

Tell us about the sustainability indices in India. Have they performed better than the mainstream index during the pandemic?  

Sustainability indices comprise of companies with a high ESG score. In India, the BSE S&P 100 ESG Index, designed to measure securities that meet sustainability investing criteria, has generated total returns of 96 per cent over the last five years. The non-ESG equivalent index has generated returns of 82 per cent over the same period (as per Bloomberg terminal information), showing a clear alpha [extra returns] generated by the ESG constituents, especially in the first 8-10 months of the pandemic. But the returns for ESG and non-ESG indexes have been similar in the last two years. 

Have big green moves positively impacted companies’ share value? Can you give us some examples?

A comparison of four energy sector companies, Tata Power, Adani Green, NTPC and Coal India, shows that firms that have pivoted towards green energy have created value, while those without credible ESG roadmaps or efforts have lost value. Adani Green stands out for generating over 7000 per cent returns over the last five years, according to Google Finance data. Conventional utilities such as Tata Power and NTPC, both of which pivoted towards clean energy with ambitious renewable energy targets, have also seen their stocks rerated. Whereas Coal India, which has not been able to show any credible pathway towards diversifying away from coal, has generated negative returns over the last five years, even though its sales and profitability have been steady. 

Does India have a green taxonomy? Who is responsible for putting it together, and is it forward-looking?

The Task Force on Sustainable Finance of the NITI Aayog and the Ministry of Environment, Forests and Climate Change constituted a working group in January 2021 to help create a taxonomy of sustainable activities. It is still in the works.

What about micro, small and medium (MSMEs) enterprises? How can they be included in this ongoing ESG shift?

Currently, small businesses do not face any regulatory, investor or civil society pressure to be ESG compliant. In the foreseeable future, the pressure to improve their ESG profile will come from supply chain partners, though over time, disclosure requirements currently applicable to large listed companies will start to apply to small and medium sized enterprises (SMEs) and MSMEs too. 

There seems to have been a flurry of ESG hiring in the last year. Do companies have people with the relevant expertise and tools? Are they putting in place the relevant KPIs for management?

There’s no doubt that India currently faces a shortage of relevant experience and subject knowledge, which partially stems from the fact that the majority of these jobs have sprung up in the last two to three years. Several corporates are reskilling and upskilling their current workforce and assigning them additional responsibilities. Several others are relying on external consultants for part-time or project-based services.

A robust ESG strategy includes having a dedicated workforce for ESG matters, headed by a chief sustainability officer and with board oversight through the relevant ESG and climate risk committees. Several larger Indian companies (mostly those with offshore investors) have started adopting these best practices.

Some companies are aligning management compensation with the achievement of ESG goals. Several educational institutions have rolled out sustainability courses, which should help plug the ESG skill gap going forward.

Tell us about the SEBI consultation paper on ESG ratings providers. By some accounts, it’s the only one of its kind in the world.

Even though their influence on investors is increasing, ESG ratings and data products remain largely unregulated across the world. In January 2022, SEBI launched a consultation paper on ESG rating providers for the securities market. Among the first of its kind in the world, the paper proposed a framework to regulate ESG rating providers (ERPs) in the country. SEBI argued that “since the activities of ERPs are typically not subject to regulatory oversight at present, increasing reliance on such unregulated entities in securities markets raises concerns about the potential risks it poses to investor protection, the transparency and efficiency of markets, risk pricing, and capital allocation, among others. Moreover, a lack of transparency in this area gives rise to the risk of greenwashing and misallocation of assets which could lead to infirmity in such ESG rating and a consequent lack of trust thereof”. This is an important first step towards regulating a rapidly evolving and dynamic new industry and creating thought leadership in establishing industry best practices for regulation.

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