The pandemic and its impact across the world is having a profound impact on how corporates operate. Today, investors are more concerned about the companies’ environmental, social, and governance conduct and intend to balance financial return with shared and inclusive values, says ESG & Policy expert Akanksha Sharma. In an interview with ET Digital, Sharma adds that judging a company merely on the profits it makes is not enough and the global investment community is taking notice. Edited excerpts.
Economic Times (ET): Why are investors extremely sensitive about Environmental, social, and governance (ESG)?
Akanksha Sharma (AS): Environmental, social, and governance (ESG) is a strong value yardstick of any business. It tells all that balance sheets cannot. As global emergencies, like climate change, manifest into natural disasters and other such socio-ecological consequences are threatening the asset interests of profit-making ventures. It is imperative to evaluate economies and companies on their environmental, social, and governance practices instead of just profits. Also, globally, the notion of perceiving success only in terms of financial growth is also transforming. The trigger spot, of course, the global investment community.
Statistically too, ESG acquiescent companies demonstrated higher performance over average S&P 500 index members. Besides, ESG metrics are far more dependable indicators of an organization’s future earnings than traditional financial ratios. The pandemic has further illustrated the essential role of socio-environmental stewardship of companies in ensuring their fiscal sustainability and mission realization.
ET: What trends do you see in sustainable investing globally?
AS: The pandemic and its aftermath have set many paradigms, compelling us to learn and unlearn how we perceive socio-economic relationships. It has brought to the fore an urgency to address persisting problems like climate change, social inequity, and labour rights violations, triggering an imperative to rebalance.
Today, investors are more concerned about the companies’ environmental, social, and governance conduct and intend to balance financial return with shared and inclusive values. In fact, 2021 has been hailed by researchers as an impressive year for Sustainability Funds. Morningstar reported an inflow of $185.3 billion into sustainability funds in the first quarter of 2021, a solid 17% bump over Q4 2020, as well as returned 8.76% during Q2 edging out both; the US Market Index and US Large-Mid Cap Index.
Consequently, I am pretty optimistic that globally sustainable investing will dominate the investor and corporate discourse in the days to come. I can foresee specific trends like:
- As the interest among the investors rises to ensure greater socio-environmental- governance accountability of their funds, we will witness a surge in the ESG ratings of businesses for channelizing investments into assets with substantial ESG value.
- With the pandemic making the risks of socio-economic divergence apparent, I think the social element in ESG should move to the forefront of policy action. How companies manage their relationships with their communities, workforces, and other critical stakeholders will determine their long-term survival and stability.
- It is expected that investors will discard linear risk assessment models that cannot factor in non-financial impacts and adopt more forward-looking periodic modeling of the potential outcomes of future physical shocks to the financial system as part of their long-term investment strategies.
ET: How do you see ESG evolving in the Indian landscape?
AS: India Inc. has only picked up momentum on ESG, attracting only a tiny share of the foreign equity ownership as ESG-focussed investment. However, recent studies suggest the outlook is fast-shifting, with 85% of the retail investors expressing interest in sustainable investing. Also, the Nifty 100 ESG index has outperformed both Nifty 50 (47%) and Nifty 100 peers in the last one year and five years segments, reflecting the rising confidence of the Indian investors on ESG compliant investing. As impact investing gains prominence as a viable investment conduit in India, investors are starting to back social enterprises with capital and knowledge and realize the potential of socially responsible investment asset classes.
The pandemic and its aftermath have set many paradigms, compelling us to learn and unlearn how we perceive socio-economic relationships.
Given the complexities and risks involved in funding social initiatives, several innovations have surfaced also on Public-Private Partnership (PPP). The Ghaziabad Municipal Corporation (GMC), recently issued municipal green bonds to raise Rs 150 crores, funding a tertiary sewage treatment plant for producing drinking water, is undoubtedly one such instance that has made me incredibly hopeful about the future of sustainable investing in the country.
Though late, I feel that transformation in India has is indeed on the right track and is also accelerating. The concept of establishing a social stock exchange in the country to facilitate capital access by organizations working on the social welfare plank and SEBI‘s continuous policy push for the Business Responsibility Reports (BRR) standard taking Indian sustainability reporting at par with the global reporting regime would be some great steps to further accelerate India’s pace on ESG.
ET: What is the status of social investing in the country? Does India have the requisite number of investors and bankable ideas to make an impact?
AS: While in 2020, $2.63 billion was received by impact enterprises through 243 equity deals, an estimated $1.2 billion was received in less than six months in 2021 from just 85 deals. However, social investing through CSR is at a very nascent stage in India. We see more ESG funds emerge, but we are still far from making it a norm to drive impact in the social sector. This is something that is the need of the hour.
India has great opportunities for social investing, which are matchless due to the scale and potential for sustainable returns, regardless of market risks. And that is why we have seen social impact investments increase over the years. However, for this to really transform the development landscape, its adoption even under CSR is crucial. The recent amendments to the CSR law even facilitate this, and we need to leverage such approaches to create lasting impact.
We need to radically improve our CSR interventions in terms of quality, outreach, and access. Apart from education receiving many funds through impact investing, we have several other concerns that plague our country, including inadequate access to water and quality healthcare, carbon emissions reduction, poverty, sustained skilling, and gender inequality. Only through such innovative approaches will we be able to maintain our development trajectory and deliver inclusive growth. The transparency and result orientation that the impact investing delivers makes it an exceptional medium that can help ensure funds for nation building are spent as effectively as possible. It has immense potential to unlock the additional funding needed to enable India to accomplish the SDGs by 2030. And as far as investors are concerned, India does have a significant amount of retail investors and HNIs. Together with foundations pooling in their resources together with public and private entities, social impact investing can effectively bridge the enormous divide that exists between the prosperous and the underserved in the country.
ET: Finance minister Nirmala Sitharaman had proposed the idea of setting up a social stock exchange. What are your thoughts on it?
AS: It is an excellent leap forward. A social stock exchange will not only boost impact investing but will also help create an unvarying framework for measuring and reporting impact, ensuring transparency in activities and utilization of funds. It will help India move forward on the social and environmental agenda by aligning norms with global standards, enabling policy advocacy and levers, and creating ecosystems for change. Overall, while it would help promote a different category of investments, it will also help innovative and tech-based social enterprises raise capital for impact-driven work while reducing duplicate efforts and streamlining capital to more beneficial and scalable programs.
Finance minister Nirmala Sitharaman had proposed the idea of setting up a social stock exchange.
ET: The idea of a carbon border tax is gaining ground in the European Union and the United States. The Biden administration is keen to see this through. What do you think will be the likely impact of this move, if such a tax is enacted?
AS: This will undoubtedly help the European Union become the first carbon-neutral continent by 2050, but at the same time, it would put suppliers of imported goods at a disadvantage promoting more eco-friendly products from local suppliers. Several developing countries, including India, have been majorly using fossil fuels, as renewable energy is yet not a feasible option from both cost and access perspectives, while the countries do not favor its use. If enacted, the carbon border tax will impact trade between EU countries and developing nations in a big way. But I look at it as a leap towards positive change, pushing suppliers to drive the net-zero agenda.
ET: India recently made changes to its CSR law with an aim of strengthening it. What are your views on the changes?
AS: The recent amendments will definitely enhance transparency with a greater focus on sustainable impact and also allow greater flexibility to India Inc. to innovate for the social good. They have brought in more clarity on several aspects, like administrative spending, the role of the Board, the way such programs need to be undertaken in their entirety. There was much ambiguity earlier, which left much room for interpretation.
Innovative financing options like impact funding earlier were an issue through CSR. However, authorizing corporates to carry forward funds through an unspent account earmarked toward a particular program will encourage such alternative funding models. At this juncture, this is essential however, this is still an ambiguous space.
I feel India Inc. must pace up with the global movement on ESG not just voluntarily but the right policy measures drawing alignment between CSR and ESG is also required opening doors of immense opportunities towards sustainable finance creating scalable solutions to solve some of the country’s most pressing problems.
ET: How do you see the ESG landscape in the future?
AS: ESG is basically an antidote to myopic management. It assures sustainable returns on investment. Being highly quantifiable, financial institutions and investors worldwide trust it. Today, several interesting financial instruments ebbed ESG, including stocks chosen by investors’ basis the sustainability performance of companies. There are many instruments too, like fixed income bonds or social bonds, particularly popular as green bonds, sustainability-linked bonds, etc. Another exciting trend is the ESG integration in mutual funds. S&P even provides various tools to support ESG investment decisions.
Increasingly, many businesses are integrating their corporate framework with ESG to mitigate sectoral risks and drive a positive development narrative. I also see innovations in the ESG space as the key to unlocking solutions to global development issues. In India’s context, we need a sustainable financing boost based on ESG to amplify not just the economy, but overall national growth and development.