Environmental, social, and governance (“ESG”) investing is rapidly gaining popularity in India, as investors are becoming more conscious of the impact their investments can have on the environment, society, and other stakeholders of companies. ESG investing focuses on companies that have strong ESG practices. Such companies are considered to be more sustainable and are likely to be more profitable in the long run.

Due to its increasing relevance, Indian corporations are facing increasing pressure to disclose information about their ESG performance and to meet certain performance standards. The Government of India (“GoI”) has been working on creating a framework to encourage more companies to adopt ESG practices. The Ministry of Corporate Affairs has issued a draft National Action Plan on Corporate Social Responsibility (“CSR”), which aims to promote sustainable and inclusive growth by mandating companies to undertake CSR activities. GoI has also launched various schemes like ‘Swachh Bharat Abhiyan’ and ‘Make in India’ to promote sustainable practices and inclusive growth in the country.

The Securities and Exchange Board of India (“SEBI”) under its Business Responsibility and Sustainability Reporting (“BRSR”) mandate has issued guidelines and the companies listed on Indian stock exchanges are now required to disclose their ESG performance in the annual reports. This move is aimed at increasing transparency and encouraging companies to adopt sustainable practices. Companies that fail to meet these standards may be at risk of reputational damage and potential financial penalties.

The Dow Jones Sustainability Indices (“DJSI”) are a benchmark for ranking companies in 61 industries, scoring them based on their responses to questionnaires called the S&P Global Corporate Sustainability Assessment. DJSI is seeing greater adoption amongst Indian companies for assessing ESG performances.

Companies that prioritize ESG issues are likely to see benefits such as improved risk management and increased access to capital. Data shows that the top performers in terms of 10-year returns are those companies that are ESG compliant. For example, companies that have strong environmental practices are less likely to face penalties for environmental violations and are more likely to be able to access capital from socially responsible investors. Similarly, companies with strong governance practices are less likely to face corruption scandals and are more likely to be able to access capital from investors looking for companies with good governance.

It is important to be cognizant of ‘greenwashing’ which is the act of making false, misleading, unsubstantiated or otherwise incomplete claims about the sustainability of a product, service, or business operation. The SEBI on February 2, 2023 reviewed the framework of Green Debt Securities (“GDS”) and introduced changes to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 requiring the issuer of any GDS to: (i) continuously monitor the operations against sustainability standards disclosed in the offer document, (ii) utilize the funds only for categories of operations set out in the definition of GDS, (iii) undertake complete and continuous disclosure of data from research when highlighting green practices, (iv) quantify the negative externalities of utilizing funds raised, (v) adhere to the highest standards for issue of GDS and associated ratings, and (vi) not make any misrepresentations about certification by a third-party entity.

Today, prior to entering into any contractual arrangements, investors and contracting parties proactively undertake searches on robust databases and information services to examine public reputation, undertake review of public profiles including social media presence and political affiliations, credit ratings, carbon trading and bankruptcy history, international sanctions, and money laundering, bribery or corruption allegations/ issues. Carrying out holistic analysis of the company’s operations will help dispel any apprehensions of misrepresentations or ‘greenwashing’ and provides for an additional level of comfort between contracting parties, prior to entering into M&A transactions, joint ventures or private equity investments.

In conclusion, ESG investing is gaining traction in India and it’s becoming increasingly important for Indian corporations to understand the implications of ESG investing and take steps to meet the growing demand for sustainable investments. This can be achieved by disclosing ESG performance in the annual reports, adopting sustainable practices and by following the guidelines and regulations framed by SEBI and GoI.

VA View:

Aside from regulatory requirements, GoI in its Annual Budget 2022-23 has implemented soft measures to support sustainable business practices, encouraging a shift towards renewable energy and more eco-friendly business methods through policies, financial incentives, and favorable tax treatment. All of this is aimed at the goal of achieving carbon neutrality by 2070.

Indian corporations need to be aware of the growing trend of ESG investing and the potential impact on their businesses through a comprehensive review of their existing policies and prepare a roadmap to guide future action.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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