As ESG is fast becoming mainstream and the following trends are becoming prevalent:
As the world grapples with environmental and social challenges in its quest for growth and value creation, companies with good ESG practices are favorably placed for inclusion in investment portfolios.
To allocate capital to companies with sustainable business practices, institutional investors and stakeholders are increasingly investing in stocks with high ESG scores, often via private equity investments or public markets.
ESG-focused funds across mutual funds and private equity investments are evaluating investee companies in terms of their:
- Environmental-friendly business practices
- Positive impact in social areas by the company products or practices
- Regulation in corporate governance and company ethics
Technology, financial services, and consumer sectors are gaining attention due to their inherent nature of business, while energy, mining, and utility sectors need to demonstrate their track record in terms of their carbon footprint, emission norms, resource utilization, and governance standards. Investors are constantly reviewing how firms report performance on ESG parameters and how they take steps to mitigate ESG-related performance gaps. Eventually, these result in a lower cost of capital and power sustainable, compliant, and purposeful business models.
Investors’ views on ESG investments
We observe that investors who actively embed ESG in their investment thesis, look at evidence-based ESG reporting, self-certifications as well as clarity and transparency on the ESG goals of companies very closely. In addition to the goals, a clear plan and glide path and key metrics go a long way in convincing investors of the focus of the management on ESG.
While performance on these targets can often be impacted by multiple factors outside the company’s control, at least a positive and purposeful intent and evidence of effort and investments across the organization, customers, and larger ecosystem is appreciated by investors.
How do Investors identify companies that meet ESG standards? What are the conditions?
With growing interest in ESG, investors feel a need for frameworks and toolkits to compare the ESG performance of investee companies. Several reputed institutions have developed their proprietary frameworks and toolkits: MSCI, FTSE ESG, WHO, World Bank - IFC, etc. to help assess companies on their ESG performance. In our view, large investors will need to design something that is in sync with their investment philosophy and processes – they may build on pre-existing frameworks, but will eventually need to mold these to fit into their scheme of things.
Coming back to India, some fund houses that offer ESG-focused mutual fund schemes are thinking of their own way of incorporating ESG considerations into their investment analysis. For instance, Quantum India ESG Equity Fund and Kotak ESG Opportunity Fund have defined their own ESG frameworks which describe the criteria for the companies they want to invest in.
FPI inflows in India
The FPI also has a clear mandate from their investors to incorporate ESG into their investment decision-making criteria. FPI investors from across the world and especially from Europe and the Americas, are demanding that Indian companies accelerate their pace of adoption of ESG norms into their businesses. Responsible Investing (RI), which entails making ESG integral to the investment process, has become a key criterion governing the process of investment decision-making across investment managers.
There is a flow of liquidity in the global financial markets after the US announced a USD 1.9 trillion pandemic relief package, which ensured a regular flow of assets into emerging markets like India. FPIs invested a record INR 1.50 trillion in Indian markets in Q3 FY 2021 with INR 0.68 trillion being invested in December 2020 alone. Increasingly, these funds will find their way into companies that score well on ESG criteria.
Private Impact Investors
While ESG investing is taking root in public markets, impact investors have been directing investments in businesses that do social good along with economic good for quite some time now. Some of the prominent sectors where impact investors have funded startups are:
- Financial services
- Technology for development
Close to US$ 90 million has been invested by impact investors in India in FY21, most of the flows have been to companies in education, healthcare, and financial inclusion spaces.
Some of the startups funded by marquee impact investors are shown below:
Milk Mantra, ULink Organics, Zameen Organic, MeraDoctor, Raya Dairy, Vaatsalya Healthcare, Waterlife, Mela Artisans
LabourNet, Asian Health Alliance, Avani Bio Energy, EduBridge
Eye-Q, Xamcheck, Be Well Hospitals, K-12 Technologies, Capital Float, NeoGrowth
DripTech, EyeNetra, Embrace Innovations
Utkarsh Micro Finance, RuralShores
Michael & Susan Dell Foundation (MSDF)
Edutel, Gray Matters India, MasteryConnect, Intellegrow, LabourNet
Vistaar Finance, Dasra, Akshara Foundation
Ruma, MYA, Kinara, MicroBenefits, Mobivi
VectorDoc, Skymet, Uniphore, MicroGraam
Source: Praxis analysis