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esg investing: Emergence of ESG compliances & its impact on MF landscape in India

The growth of Environment, Social, Governance (ESG) consciousness in India is phenomenal but still in its nascent stages.

The fact that this growth is being carefully governed by a gradual implementation of several laws and regulations gives ample chance for integration of the ESG agenda with business operations.

Correctly applied, this could lead to more economic opportunities and is as close to the idea of responsible capitalism as can be.

By 2025, ESG investments are also expected to cross $1 trillion. At the core of this growth in the ESG ecosystem are ESG disclosures.

ESG disclosures ensure quantifiable, defined and clearly-demarcated parameters. These can be compared across businesses easily. They also adhere to the evolving legal obligations of a corporation as their data is collected through a performance rating framework.

To ESG disclosures, an investor can apply the rules of economics with reliability to make relevant investment decisions.

This investment interest is now percolating into the Indian mutual fund industry. More than 15 such mutual funds exist in the Indian market today, a number soon to rise.Interest from investors and in turn the mutual fund industry is bound to precipitously expand given the global scenario of climate awareness as well as the benefits (including economic) of responsible business practices.

In fact, multiple Indian AMCs have already become signatories to United Nations-supported principles for responsible investment (UNPRI).

Given the increasingly international nature of business, very soon, being a signatory to the UNPRI will become an economic necessity.

The top factors that are limiting the growth of sustainable investment in India are accessibility (51%), comparability (49%) and comprehensibility (44%).

And yet a total of 64% of Indian investors are looking for sustainable investments.

With the issuance of SEBI’s new consultation paper on the subject, ESG disclosures are bound to massively increase accessibility, comparability as well as comprehensibility ensuring that these three barriers to the growth of sustainable investments in India are addressed.

So far, investors have also been wary of sustainable investments due to greenwashing considerations.

But as more and more corporations realize the economic benefits of accurate ESG disclosures and the downsides associated with incorrect disclosures, greenwashing is fast becoming less attractive for corporates.

Simply put, it’s not economical anymore. This will also boost investor confidence, which will translate over time to more ESG investments.

As ESG disclosures become the norm, even for mid and small-scale businesses, the certainty of quantifiable parameters will ensure a steady stream of investment based on those parameters.

There will be a proportionally direct impact on the growth of ESG investments due to the increased penetration of ESG performance reporting to businesses of all sizes.

India is already waking up to this new reality with the mutual fund market responding very positively to ESG-based investments. This trend is the reality of tomorrow.

(The author Anu Chaudhary is Partner, Global Head of ESG Consulting, Uniqus Consultech)

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