Assets dedicated to sustainable investment have grown at 11 per cent CAGR since 2014, and the growth is expected to be similar over next couple of years. The AUM of self-identified ESG funds is expected to contribute close to 36 per cent of global AUM by 2022. ESG is expected to become an essential part of investors long-term equity allocation. Participation from retail investors in the ESG space is hovering around 25 per cent and is expected to see a strong growth in coming years. India too is witnessing a noteworthy traction in this space. Firms like SBI Mutual Fund have integrated the ESG research into their core investment process. Quantum, SBI, Kotak, ICICI Prudential, and Axis Mutual Funds have taken a lead in rolling out ESG theme funds whereas DSP Mutual Fund, Aditya Birla Mutual Fund, and BNP Paribas Mutual Fund have already filed their offer documents with Sebi for approval of ESG theme funds.
As per our study, India has ranked high on policy community involvement with transparency rating of 99 per cent, compared with 80 per cent for the wider universe. On equal voting rights policy India has scored 98 per cent, against 97 per cent for South Africa, 95 per cent for Brazil, and 98 per cent for China.
There is need to improve our disclosure framework (BRR) and push various stakeholders like asset managers, investment bankers, pensions, and corporates to integrate ESG measures in their workflows.
The ESG information is sourced through CSR reports, annual reports, company websites, stock exchange filings, NGO websites, and news sources. Fund Managers actively use market data platforms like ours, to get standardized and analytically presented information on ESG. Globally, a few approaches used for ESG investing include, the exclusion policy, where fund managers exclude investment sectors that are conflicting with their investment criteria, like during stock picking, they might avoid companies dealing in weapons, tobacco, or making investments in countries with poor human-rights records. Similar to the exclusion policy, is the norms-based exclusion approach, wherein fund managers through negative screening restrict their investments in companies who do not meet widely accepted norms, such as the United Nations (UN) Sustainable Development Goals, Carbon emission standards etc. Under Active Ownership approach, fund managers seek to influence companies during engagement and consulting by setting up regular meetings with top management, exchanging information and developing a trusted adviser relationship.
We expect the ESG integration to move from ‘nice to have’ in some markets and ‘mainstream’ in others, to ‘mandated’ by regulators. Future economic growth largely depends on how quickly and effectively we can respond to social and environmental challenges, especially those presented to our society by changing current systems, capital allocation processes and consumption behaviors. Policy makers shall increasingly recognize that the financial system can significantly influence the real economy in either direction – towards sustainability or undermining progress made against environmental and social goals.
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