State of ESG in the Public Equity space in India

31 Jul 2021

Welcome folks to our inaugural ESG piece!

Here, we will attempt to dissect and discuss the current state of Environment, Social, and Governance (ESG) within the Public Equities space in India and how investors alike could navigate through the intricacy and complexity surrounding this particular area.

In this piece, we will cover ESG’s from a few angles:

  • The current scenario in India

  • Introduction of policies by regulatory bodies to align to global standards

  • The way forward for Asia and India


Up till now, ESG, and especially the environment aspect, has been one of the most discussed topics in town and especially gained spotlight during Covid-19. The pandemic has accelerated a global phenomenon for companies to commit to ESG and is no longer limited to a “Rich World Phenomenon”. With Biden administration recently announced American Jobs Plan and actions to combat climate change, there is a more imperative need for all investors to look at ESG and especially how could one navigate around the intricacy of this topic. Emerging markets, including India, are focusing on enhancing their ESG disclosures. ESG factors are no longer a “good to have” but a “must have” for every corporation. Businesses have a greater role beyond chasing after mere profits (Here we are looking at the triple bottom line – Profit, People, and Planet). For this article, we will analyze one of the important emerging markets, India, through an environmental, social, and governance lens.

Does sustainable investing leads to sustainable growth?

Companies pursue sustainability because it has a material impact. Creating a sustainable process for efficient use of resources (energy, water, and waste in relation to revenue) is a strong indicator of superior financial performance overall. In each sector, there are companies that did particularly well, and these were the ones that had taken their sustainability strategies the furthest. Companies that focus on their ESG parameters not only have higher growth, but also stronger earnings growth and dividends. Between May 2013 – November 2020, ESG focused companies with excellent ratings have seen an active return of 1.31%. (Exhibit 1)

Exhibit 1 – Decomposition of Returns by ESG Ratings

Kotak MF - ESG Rating Level - November 2020

Source: MSCI Fact Check: The Truth Behind 5 ESG Myths (Dec 2020)


The emerging markets landscape - India

One would usually think of the west and the developed markets in terms of ESG awareness and information available are generally focussed towards these markets with Europe and South America taking the lead (Exhibit 2). The buy-in for ESG investing in the Asia Pacific, especially the emerging economies has been gradual (Exhibit 3). As per CFA research back in 2019, “The main barriers to equity and fixed-income integration in India are a limited understanding of ESG issues, a lack of company culture around ESG integration and a lack of client demand”. We do reckon that was the case back then; however, ever since Covid-19 and the rekindled focus on ESG by the mainstream, we have witnessed a lot of improvement in company culture on ESG as well as government focus on making public reporting of these indicators as transparent as before. In addition, one would think that India may be laggards in terms of E, S, and G, however, the reality is very much different - Disclosure scores have improved significantly along the years (Exhibit 4).

Kotak MF - ESG Disclosure Score - Asia

Kotak MF - ESG Disclosure India vs Global - FY20

India fares well, thanks to a rising number of local institutional investors for pushing through this topic with Indian firms along with foreign investors. Regulatory framework and policies are also trying to keep pace with the change.


State of ESG disclosure in India’s firms

Given this backdrop, it does not come as a surprise to us that India actually is better than global averages in certain sectors though India still lags in other sectors on ESG disclosures. The cement and IT industry are where India does pretty well (Figure 5). India scores well on Social disclosures, but lags on Environmental and Governance disclosures (Exhibit 6-8). However, we reckon that majority of the disclosure scores are still a work in progress for the firms in India (disclosures are more prominent for the largest firms within India and still relatively weak for mid to small-cap firms). Nonetheless, there is a major shift in disclosures by firms compared to a couple of years ago and India is working hard towards having more transparency in this area. With the recent Securities and Exchange Board of India (SEBI) new reporting requirements announced in March 2021, we expect to see an exponential improvement in disclosures by the Indian firm within the next 2-3 years to come. Moreover, as more international organisations come into the picture, such as Climate Action 100+, The Asia Investor Group on Climate Change (AIGCC) as well as investors’ own engagement efforts, we see the potential of an improvement in disclosures and actual improvements in terms of ESG.

Kotak MF - ESG Disclosure Score : India vs Global Average - FY 18

Exhibit 6-8: Individual Environmental, Social and Governance disclosure scores (India vs. global average)

Kotak MF - Enironmental & Social Discloure Score

Kotak MF - Governance Disclosure Score

Source: Edelweiss Research, based on Bloomberg ESG Disclosure scores


Adoption of responsible business practices: Journey from Business Responsibility Reporting (BRR) to Business Responsibility and Sustainability Reporting (BRSR)

In order to create awareness regarding corporate responsibility – SEBI in 2012 initiated the requirement of Business Responsibility Report (BRR) along with Annual Report mandatory for top 100 National Stock Exchange of India (NSE) listed companies. The format included basic company and important financial information along with disclosure specifically of policies relating to Corporate Governance, Anti-Corruption, Money Laundering and Board Independence. This created changes in reporting details that were seen from 2014 onwards; with companies disclosing not only the policies that they have but also auditing and training details – specifically towards governance and anti-corruption. Further in December 2019, SEBI mandated BRR filing to top 1000 companies by market capitalization.

BRR being more focused towards governance

In March 2021, SEBI introduced one more layer of transparency with Business Responsibility and Sustainability Reporting (BRSR). The new format has taken a more granular approach with factors - Environmental (GHG Emissions, Carbon Neutral, and Deforestation, etc.), Social (Employees welfare, Consumer protection, Privacy, and Data Security, etc.) and Governance (Board, Pay, Audit and Ownership). The BRSR will be applicable to the top 1000 listed entities on a voluntary basis for the financial year 2021-22 and on a mandatory basis from the financial year 2022-23.

The positive changes are expected to be noticed in the coming years making Indian companies easier to compare with international standards such as Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB).

The way forward

  1. Climate change (Sustainable Development Goal 13: Climate Action) as an imperative topic of discussion

Ahead of the 26th UN Climate Change Conference of the Parties (COP26) in November 2021, momentum is growing with the world racing towards net zero. 2021 could well be a year that we will witness a plethora of regulatory, legislative, industries, and companies’ initiatives to combat climate change – Climate and renewable energy are the key focal points globally.

Climate plans are more developed within Europe, with the EU climate action and the European Green Deal setting forward ambitious policies to fight climate change (e.g. Europe aims to become the world’s first climate-neutral continent by 2050).

Nevertheless, within Asia itself, awareness has grown about the risk of climate change; however, there are just a handful of countries that have stepped forward with announcements to mitigate GHG emissions with their renewed Nationally Determined Contributions (NDCs) submitted under the Paris Agreement. Hence, there is an imperative need for more Asian countries to recognise the importance of climate risk and to take charge to drive changes.  

According to Asia Investor Group on Climate Change (AIGCC) report in March 2021, China, Japan, and South Korea have recently pledged net-zero targets by the middle of this century. India has set ambitious renewable energy targets whilst having exceeded the previous goal (Exhibit 9).

Exhibit 9: Mitigation targets of China, India, Japan, South Korea

Kotak MF - Climiate Mitigation targets described in Country's NDC

Also, AIGCC believed that China, India, and Vietnam have the most realistic chance of reaching their 2030 wind and solar capacity targets (Exhibit 10). 

Exhibit 10: Summary assessment of Asian countries decarbonisation potential

Kotak MF - Renewable Capacity countrywise distribution - 2020

Aiming for carbon neutrality and setting the path to decarbonisation is an important topic countries and companies need to tackle.

Food for thought: Can that be a more Asia-centric concept moving forward?

    2. Driving climate awareness from bottoms up

For asset managers like ourselves, integrating climate resiliency into investments can promote sustainability and protect development gains; hence there is importance for investors to drive stewardship and engagement activities with companies. Working groups like UNPRI, Climate Action 100+, Net Zero Asset Owner Alliance (just to name a few) provide collaborative platforms for asset owners and managers to engage companies on climate related topics and to drive awareness and the importance of climate action. We believe that collectively, these efforts will impact the investing space and secure a sustainable future for all.

Adjusting local nuances towards sustainability

Needless to say, one cannot use the international standards to benchmark India but would have to adjust to local nuances. For example; it is likely impossible for India to totally phase out fossil fuels in the short term like what the developed countries are doing. However, instead of entirely divesting monies out from these companies and leave it to the “invisible hands” to do its work, we could encourage these firms to adopt a more sustainable approach towards lower carbon emission process.

SEBI’s BRSR is looked as a positive way forward, though it will take time to structure and build across all the companies. Most Indian companies have been working in a sustainable way but never thought to pen down these actions in words (Exhibit 11).

Exhibit 11: Sustainable actions and ways adopted by some companies

Kotak MF Sustainable Actions

Most recently, many companies have started integrating ESG strategies and are adhering to global standards such as Climate Group’s EV100/EP100 and RV100. In addition, we are now seeing Indian companies aligning their strategies to Sustainable Developmental Goals (SDGs).

All in all, sustainability is definitely going to be a long journey but we are sure India would soon be able to catch up with the rest in terms of ESG.

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© Kotak Mutual Fund.2023
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
© Kotak Mutual Fund.2023
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
© Kotak Mutual Fund.2023
Mutual fund investments are subject to market risks, read all scheme related documents carefully.