ESG in India: It’s Time to Take Notice

Commitment to change and sustainability is imperative for any organization to evolve into a future-proof business.

Organizations should be aware that establishing environmental, social, and governance ("ESG") frameworks—which include a strong corporate governance structure, sustainable procurement, diversity & inclusion, supporting local businesses, and being mindful of future resource consumption—is crucial to building resilience and increasing stakeholder buy-in.

modern investing Sustainable investments are prioritized in these, and actively managed funds use ESG criteria as part of their collateral. This has been reflected in the sharp rise in ESG fund assets under management ("AUM") in India, which have grown exponentially over the past four years, from USD$283.5 million1 (INR 2,268 crore) in March 2019 to USD$1.5 billion (INR 12,447 crore) in March 2022. 2

Organizations have been preparing for future regulations that would require them to declare net zero emission targets after the Prime Minister of India announced that the country will achieve net zero emissions by 2070 and India's updated climate pledge4 as part of the Paris Agreement, a global treaty where 196 countries agreed to work together to reduce greenhouse gas ("GHG") emissions. These businesses make timeframe commitments based on science-based targets, allowing them to track, monitor, and report on their commitments on a regular basis. Similar aggressive carbon emission objectives have been set by major international corporations' Indian operations, with some aiming to meet these goals as early as 20305.

ESG has been a trending topic for a while, and recently the U.S. Securities and Exchange Commission ("SEC"), which is looking into possible greenwashing by financial institutions and related investment funds, has taken notice.

Implementing meaningful ESG efforts, establishing attainable sustainability targets, and routinely evaluating and tracking their progress may all tremendously benefit organisations. These evaluations and monitoring tools help institutions discover profitable long-term investments, cut expenses, minimize risks, look for capital inflows, and meet their short-term sustainability commitments.

How can companies yield results by implementing robust ESG program and conducting periodic ESG assessments?

• Cost savings: Investors and company promoters are moving away from thinking of ESG adoption as a cost and toward thinking of it as a long-term investment. Companies who use their R&D divisions to generate innovative, cost-effective sustainable products and designs are discovering these advancements. Savings from effective energy and water use can be enormous, especially now that the cost of solar and other renewable energy sources is on the decline. Redesigning procedures to minimize waste can help to further cut costs, guarantee the effective use of resources, and be environmentally responsible.

• Helps with price negotiations: For investors, conducting ESG due diligence before making an investment can be vital in figuring out the costs and dangers associated, as this not only has an impact on the investor's reputation but can also be helpful during negotiations. Investors acquire a clear action plan for the short- and long-term to address the problems found during the evaluation, based on a predetermined risk prioritization, through this exercise. On the other hand, investors can avoid price cuts during divestment through ESG evaluations, which can identify warning signs and offer workable solutions, making the company a stronger possibility for potential new investors.

• Better interest rates: Since 2017, sustainability-linked loans have been more popular in the West. In the Asia Pacific area, they are still in their infancy but are rapidly gaining ground. Approximately USD$22 billion in sustainability-linked loans were closed in the Asia Pacific area in the first five months of 2022, according to Bloomberg, more than doubling the amount in the same time of the prior year. Companies can now enter into a special agreement with their financiers that allows them to tie their ESG rating to interest rates and receive penalties if the predetermined goals are not met. The need that businesses report the specified KPIs to the financial institutions on a regular basis eliminates any room for greenwashing and can serve as a motivator for businesses to include ESG compliance into their corporate strategy.

Accountability is currently the main obstacle to ESG acceptability. Internationally recognised reporting frameworks help businesses report on climate-related disclosures to investors, lenders, and insurance underwriters with transparency and consistency. One such framework is the Task Force on Climate-Related Financial Disclosures ("TCFD"), which was developed by the Basel-based Financial Stability Board ("FSB"). 11 The United Nations Sustainability Development Goals ("UN SDGs"), adopted by all 193 member states12, place responsibility on businesses to achieve sustainable development by incorporating the 17 outlined goals into their corporate strategy. The TCFD reporting framework has gained momentum since its inception as countries incorporate it into their regulatory frameworks. Businesses that proactively comply with such international guidelines set themselves apart from businesses that do not contribute to protecting the environment from climate change and so become more appealing investments.