The Evolving Landscape of ESG Investing in India: Insights from Priyanka Dhingra
In a recent conversation with ET Edge Insights, Priyanka Dhingra, an ESG Analyst at SBI Mutual Fund, shed light on the rapidly changing dynamics of Environmental, Social, and Governance (ESG) investing in India. As the country strives to align its financial markets with sustainable practices, the question arises: Are we focusing too much on scoring companies rather than identifying genuine investment opportunities?
The Rise of ESG Investing in India
The years 2020-2021 marked a significant turning point for ESG as an investment theme in India. The Assets Under Management (AUM) of ESG mutual funds skyrocketed from INR 2,703 crore in 2019 to INR 10,635 crore in 2023, with 11 ESG funds available in the market. However, by March 2024, the AUM had dipped to INR 9,753 crore, indicating a potential shift in investor sentiment. Initially, the market’s ESG focus revolved around excluding sectors with negative social implications—such as alcohol, tobacco, and gambling—while favoring companies with high ESG ratings to mitigate risks associated with poor governance and environmental practices.
Challenges in ESG Fund Performance
Despite the initial enthusiasm, data on fund performance has revealed significant challenges. While ESG funds demonstrated resilience during the COVID-19 crisis, they faltered during the energy crisis triggered by the Russia-Ukraine war in 2022. Traditional energy stocks surged during this period, while ESG funds, which typically avoided conventional energy and defense stocks, struggled to keep pace. This underperformance coincided with a growing backlash against ESG investing in the United States, where states like Florida and Texas imposed restrictions on ESG-based investment strategies for state funds. The global narrative around ESG has also been marred by allegations of "greenwashing," where companies overstate their ESG credentials, leading to a decline in trust among investors.
The Impact of Global Pressures
The global backlash against ESG investing has reverberated through India’s financial landscape. With no new ESG funds launched since 2022 and ongoing fund outflows, the future of ESG investing appears uncertain. Compounding the issue, regulators worldwide grapple with differing opinions, ratings, and strategies related to ESG, adding complexity to the investment environment.
Reevaluating ESG Ratings
One of the critical issues plaguing ESG investing is the reliance on historical data for ESG ratings. Many rating agencies evaluate companies based on past performance in environmental, social, and governance criteria, which can lead to industry biases. For instance, sectors like IT and FMCG often receive high ESG ratings due to perceived lower risks, yet they may not directly contribute to India’s sustainability goals, such as achieving 50% power generation from non-fossil fuels by 2030. Furthermore, discrepancies among ESG rating agencies create confusion for investors, making it challenging to correlate stock prices with ESG ratings.
A New Paradigm: ESG Opportunities
As the landscape shifts, the question arises: Is this the end of ESG as we know it? Dhingra suggests that ESG may function better as a hygiene tool rather than a standalone investment strategy. Instead of relying solely on ESG ratings, investors should focus on identifying ESG opportunities—companies that contribute directly to sustainability goals, regardless of their ESG scores.
Sectors such as renewable energy, electric vehicles, and water conservation present significant investment opportunities in India. The country aims to achieve a renewable energy capacity of 500 GW by 2030, requiring an investment of USD 358 billion. Similarly, the Indian electric vehicle market is projected to grow from USD 3.21 billion in 2022 to USD 113.99 billion by 2029, with a remarkable CAGR of 66.52%. Companies in these sectors are poised to drive India’s transition to a low-carbon future, as evidenced by the surge in stock prices of renewable energy firms and electric mobility companies in recent years.
Regulatory Developments and Future Prospects
In response to the evolving landscape, the Securities and Exchange Board of India (SEBI) has introduced six new sub-categories under ESG Funds, including "Sustainability-oriented" and "Transition Funds." These categories aim to accommodate opportunity-oriented strategies, allowing investors to capitalize on the growing demand for sustainable investments.
As the ESG landscape continues to evolve, it remains to be seen whether investors can leverage these opportunities to generate alpha, potentially breathing new life into ESG investing in its updated form.
Conclusion
The conversation with Priyanka Dhingra highlights the complexities and challenges facing ESG investing in India. While the initial enthusiasm may have waned, the potential for sustainable investments remains robust. By shifting focus from mere ratings to identifying genuine opportunities, investors can play a pivotal role in driving India’s green ambitions forward. As the financial landscape adapts to these changes, the future of ESG investing may be brighter than it seems, provided that stakeholders embrace a more nuanced and opportunity-driven approach.
Disclaimer: The views expressed in this article are those of the author/authors and do not necessarily reflect the views of ET Edge Insights, its management, or its members.