ESG Investments in India

Globally, the Environment, Social and Governance (ESG) is witnessing a classic inflection point, driven by two ground-breaking events in 2015- the Paris Accord covering 190 countries, and the global adoption of UN SDGs. Traditionally, ESG risks and opportunities were the forte of only MDBs and DFIs (Multilateral Development Banks and Development Financial Institutions), as a fiduciary duty towards its stakeholders. In fact, if ESG was being written about five years back, many would have thought of it as a fuzzy concept, as linkages with investments and the financial community were not well-established.

Thanks to the emergence of hard data that clearly establish the linkage of economic costs to ESG risks (in the last decade, for example, the world has faced losses estimated over USD 1 trillion, just on account of erratic weather), businesses are starting to include it as part of their business strategies. Today, conversations regarding ESG are gathering momentum within Governments and private sector, as there is a realization that adverse effects of extreme weather, natural resource depletion or social issues, may threaten financial stability.

To my mind, the following developments have set the tone for ESG-thinking and would pave path for its seamless integration:

• Firstly, strong legislations are emerging that focus on ESG in financing. The European Union, for example, has launched an action plan on financing sustainable development, with a focus on driving ESG investments. It encapsulates a detailed taxonomy demystifying ESG for investors to make financial decisions. Other key examples would include UK, Japan and China that have released specific policies on sustainable finance and ESG
• Secondly, the Financial Stability Board’s victorious Task force on Climate related Financial Disclosures (TCFD) recommendations have provided a comprehensive, practical and flexible framework for disclosures on climate risks and opportunities. It is not a matter of surprise to see as many as 84 key global institutions (covering central banks including RBI, IMF, OECD, World Bank) and international standard-setting bodies representing the board. In fact, the TCFD supporters now control balance sheets totaling USD 120 trillion, and 80% of 1,100 top companies of G20 are already disclosing climate related financial risks, under the TCFD guidance. The key success indicator of this framework lies in the commitment that Mark Carney (Governor, Bank of England (BoE)) made to mainstream the work of TCFD, through climate stress testing of UK’s banking sector; making BoE the first central bank to do so
• Finally, it helped enormously that bodies like the International Monetary Fund (IMF) and European Central Bank (ECB) are emphasizing on climate change as a mission critical priority, and are working towards integrating environmental risks in economic analysis. Another example is the recent United Nations Secretary General’s Climate Week, where the world’s largest investors that direct about USD 3.9 trillion, formed a “Net Zero Asset Owner Alliance”, and committed to carbon neutrality by 2050. The global business community too is not far behind. It is playing its part through voluntary commitments on de-carbonization, with initiatives such as RE100 or SBTi

These developments clearly indicate that the evolution of climate-aligned regulations and policies across the globe is inevitable. With the interconnected global financial system, India will also witness the ripple effects in terms of its own regulation, similar to that of the EU and other nations. Given that India is one of the top 5 countries to face economic losses due to climate change (over USD 12 billion annually), the Indian financial sector, including insurance, banking, asset managers and asset owners, need to specifically take climate risks into account and build a resilient approach to making sustainable investing mainstream.

In conclusion, it would be apt to say that developing an ESG investing ecosystem and enabling India to achieve a 100% ESG aligned economy is “a very big opportunity”. As we have heard a zillion time, in Game of Thrones that “Winter is coming”. So is “Climate Change”. It is time to act now and embark on the ESG journey with our strategy dragons.

Namita Vikas

YES BANK has recently released a report: ‘ESG Investing Scenario in India’, that encapsulates inputs from leading ESG funds and advisors, and covers the length and breadth of ESG investing. It also stresses upon the business case in delivering long-term financial returns and presents mounting evidence of how ESG integration builds resilience within the financial institutions, to withstand climate adversities and changing norms. The report may be accessed here.