Higher ESG standards in India is in everyone’s interest
Environmental, Social and Governance (ESG) criteria have become increasingly important in global investment markets in recent years. Some $40 trillion, more than a quarter of total professionally managed assets, is now in funds that have overt ESG objectives.
India has, in some ways, been late to the ESG party. Only last year were the first-ESG oriented public markets funds announced. ESG assessment tools show Indian listed companies, on average, as lagging global peers on adopting and improving ESG standards and disclosure.
While not unique in suffering governance failures, India has had its fair share of governance scandals. Most recently, two major financial institutions, a large private sector bank (YES) and a leading Non-Bank Finance Company (ILF&S), have needed bail-outs.
In other ways, however, the best Indian companies have long advocated responsible corporate behaviour which would now be termed as ESG-compliant. As a director of Tata Sons, I used to be bemused by lectures from overseas on corporate responsibility. The Tata Group is majority owned by charities which have done remarkable work in India and internationally for more than a century.
Perhaps given the overall poor standards of public services, Indian companies have often been more committed to supporting communities than would be true in more advanced markets. Since 2014, all Indian companies over certain levels of turnover and profitability have been obliged to spend at least 2% of net profit on social responsibility.
On corporate governance, India’s record has been less consistent. A small number of leading companies, including Tata, Infosys and Mahindra, have long benchmarked their governance to international best practice. However, India has some 6,800 listed companies and governance practices have often been poor. Many promoters justify their actions as necessitated by the absurdly complicated tax and regulatory regime in which they operate. In reality, at the heart of such issues often lie conflicts of interest between the controlling promoter group or family, often in the minority, and public shareholders.
Regulation has, over the past decade, broadly caught up with international standards. The Companies Act 2013 introduced many important changes which have now been incorporated in SEBI’s rules and Listing Agreements. One important development has been the requirement for improved disclosure in a Business Responsibility Report (BRR), first introduced in 2013 for the top 100 companies and extended progressively to the top 1,000. The Ministry of Corporate Affairs (MCA) is about to publish a revised requirement for a Business Responsibility and Sustainability Report (BRSR).
In many ways the most pressing agenda in India is environmental performance. Historically, India has not been a major emitter of Green House Gases (GHG), either in total or per capita. But India is among the countries most vulnerable to the impact of climate change given its dependence on the monsoon and vulnerability to increasing temperature, more intense storms and rising sea levels. Looking forward, if India develops as rapidly as projected, it will quickly become the major incremental emitter of GHGs. Were India’s per capita GHG emissions to reach today’s levels of GHG emissions of China and USA, global CO2e emissions are estimated to increase by 12.5% and 35.4% respectively.
India seems set to meet its Nationally Determined Contributions (NDCs) under the Paris Agreement, principally through the very rapid adoption of renewable energy. India now has 35 GW of solar and 38 GW of wind power installed, and the government has revised upwards the target to achieve 175 GW of renewables by 2022. There remains, nevertheless, massive scope for further decarbonisation of the Indian economy, especially in energy use (73% of emissions), principally in power generation, industry, agriculture, transport and buildings.
“While not unique in suffering governance failures, India has had its fair share of governance scandals”
Higher standards of ESG performance will now be expected of Indian companies by regulators, investors, customers and consumers. The good news is that it is in the interests of Indian companies and their owners to raise their game. The correlation between ESG compliance and share price is increasingly accepted, resulting from better growth rates, lower costs and lower cost of capital. The MSCI India ESG Leaders Index has outperformed the broader MSCI India Index in the period September 2007 to June 2020 by 76% in dollar terms (143% in Rupee terms).
Foreign investors in India will increasingly be able to draw comfort from the expectation of better ESG performance in both public and private companies, underpinned by better disclosure. Unfortunately, there will be lapses and failures, and progress will only come with hard and persistent effort. There will be no relaxation in the need for vigilance, monitoring, insights and good relationships to ensure success in the complicated and dynamic Indian market.
Alan Rosling, CBE acts as Asia Advisor for the commercial intelligence, investigations and security company, Audere International, which is able to undertake comprehensive ESG due diligence checks on a client’s behalf. He is also a Co-founder of ECube Investment Advisors and was earlier a Co-founder of Kiran Energy and a Director of Tata Sons.