The big ESG meltdown: Amid allegations of greenwashing and record fund exits, can ESG be saved?

ESG has been the subject of an intense debate, with some terming it ‘woke capitalism’, especially in the US. As a result, investors pulled out $13 billion from sustainable funds in the US in 2023. Asian markets, too, saw mild outflows in 2023. One of the biggest exceptions is Europe, which continues to lead in sustainable investment, attracting $10.9 billion in sustainable funds in the January-March quarter of 2024.

India was a latecomer to the ESG party, but there has been a significant increase in investments in such funds over the past seven years. The assets under management (AUM) of active ESG mutual funds grew significantly from under `3,000 crore in December 2019, when there were just two schemes, to `12,000 crore in December 2021, when there were eight schemes. But since then, the AUM has broadly remained flat—in the `10,000–11,000 crore range—and there have been no new fund offers (NFOs).

The question now is whether Indian investors, who haven’t been very enthusiastic about sustainable investments, will be influenced by the global volatility in the ESG space.

Rohit Shimpi, Manager of the SBI ESG Exclusionary Strategy Fund, feels the situation is different in India. “While the number of ESG funds has remained constant post-2021, the ESG regulatory space has evolved, the number of UN PRI (Principles for Responsible Investment) signatories has increased, and there is an ever-growing number of ESG analytics firms providing such analysis that can be factored in while making investment decisions,” Shimpi says. This, to him, indicates that the term ESG may undergo a change, but companies are likely to work more to ensure that there are sustainable practices.

As Shimpi points out, there has been a significant regulatory nudge aimed at encouraging companies to adopt sustainable practices. For instance, the capital markets regulator, the Securities and Exchange Board of India (Sebi), brought in the Business Responsibility and Sustainability Reporting (BRSR) framework. According to this, it is mandatory for the Top 1,000 listed firms by market capitalisation to provide details of various sustainable practices they have undertaken from FY24. Subsequently, it brought in the BRSR Core, which requires the top firms to also account for the impact of their supply chain and mandatorily undertake reasonable assurance. This will apply to the Top 150 firms by market cap in FY24, the Top 250 in FY25, and the Top 1,000 firms by FY27.

A recent PwC assessment of BRSR disclosures by the Top 100 companies in FY24 shows that ESG considerations have become key strategic priorities in boardroom discussions.

The Indian scenario

Fund managers feel that mandating BRSR for the Top 1,000 listed entities has been a great initiative for ensuring that ESG investors have access to ground-level data. In the past two years, these disclosures have helped fund managers evaluate the ESG performance of companies.

Ashwin Patni, Head-Products and Alternatives at Axis AMC, says ESG investing has made significant progress in India with strong regulatory support.

“However, we should also recognise that ESG is still evolving (even at the global level), and we expect domestic investors to take more time to start factoring it into their decision-making,” he tells BT.

Amit Kapur, Managing Partner, JSA Advocates & Solicitors, is optimistic of Indian ESG funds picking up in the future, irrespective of the meltdown in some other markets, because decarbonisation remains a core theme for Indian industry.

“India adopted the ESG framework long after the US and Europe. We have learnt from their mistakes, with political leaders, regulators, investors, financial institutions, and the citizen being better aligned on the need for ESG investments,” Kapur tells BT.

The BRSR has made it possible for ESG analysts and fund managers to collate sector-level, issue-based data. Though there are questions about the quality of data, the situation is expected to improve with more companies coming under the ambit of the BRSR Core.

SBI’s Shimpi explains that, for instance, it is now possible to see which retail company has the highest level of employee attrition and see if that has a correlation with lower productivity, sales, or high employee costs. “This has made ESG more quantitative and financially relatable than a qualitative summary that was merely a narrative and couldn’t be related [to] financially,” he adds.

The way ahead

One lacuna in India’s ESG approach is the absence of a sectoral reporting framework that many other countries have adopted.

“There is a need for sector-specific reporting frameworks. The existing BRSR framework needs to be customised for all companies that are environmentally impactful in their sectors. Sector-specific formats will make the reporting framework more relatable from the preparer’s perspective, besides improving its utility from a user/investor perspective,” says JSA’s Kapur. Such measures could be incorporated in the future.

The world over, asset owners have taken a much larger role in ESG investments and mandated asset managers to apply an ESG lens to investing. In other places, a regulatory push has led to the incorporation of such strategies.

Green taxonomy is another grey area that needs attention. A sustainable taxonomy defining sectors and projects to attract green financing has been in the works for some time. But it hasn’t been finalised yet.

However, all things considered, there is reason to be optimistic about India’s ESG journey. Globally, the demand for such funds is higher among millennials and the GenZ. Considering India’s demographic advantage here, ESG fund managers can justifiably feel hopeful.

@richajourno