FPI are being mandated by their investors to incorporate ESG into their investment decision-making criteria
In the second quarter of 2020-21, an interesting trend was observed during the post-earnings conference calls of many large-cap companies. Most of these large firms pointed out in detail about their enhanced focus on adoption of Environmental, Social and Governance (ESG) practices into their respective business processes.
Responsible Investing (RI), which entails making ESG integral to the investment process, has become a key criteria governing the process of investment decision-making in Europe, Canada, North America, Australia and New Zealand and also, to some extent, in Asia. The latest report by the Responsible Investment Association suggests that RI Assets Under Management (RI-AUM) in Canada stood at C$3.2 trillion as on 31st December 2019, which was a 48 per cent growth over two years. With India looking at a larger influx of foreign investors to fund the economy’s growth, it's high time that our companies woke up to the need of bringing ESG into the mainstream of their business practices to attract long-term foreign investments.
ESG score will sway investment decision
As global investment experts put it, ESG is no longer a “nice to have” factor for businesses but it is becoming a must-have criteria and integral to business strategy. The ESG score, which is an indicator of the level of ESG adoption by corporates, is becoming the prime criterion driving investment decisions.
The Foreign Portfolio Investors (FPI) are increasingly being mandated by their investors as well to incorporate ESG into their investment decision-making criteria. Hence, FPI investors, especially those from Europe and Canada,are demandingIndian companies accelerate their pace of adoption of ESG norms into their businesses. The first tell-tale signs of the change for Indian businesses was visible during the Q2 earnings call in tandem with a pick-up in FPI flows in the current quarter.
Rising FPI flows driving change
FPI inflows are expected to increase in the current quarter with $7.75 billion investments coming in the month of Novemberalone, taking YTD inflows to $14.2 billion. Going forward, this trend may continue,depending on the pace at which Indian companies integrate ESG parameters into their businesses. Indian companies will have to incorporate ESG norms at the earliest to remain in the investment radar of the FPIs. Additionally, India is a signatory to the 2016 Paris Agreement on Climate Change. Now with Joe Biden’s administration taking over on 20th January, 2021 and the appointment of Mr. John Kerry as the climate envoy, these changes signify the pressing agenda for adhering to the Paris Agreement, which was signed by John Kerry himself on behalf of the USA on April 22, 2016. India’s adhering to the undertakings given at the Paris climate meet itself will indirectly force the Indian companies to hasten adoption of ESG norms.
To conclude:
Adoption of ESG parameters is no longer optional for Indian companies, it’s now imperative. The surge in assets and the large quantum of USD dedicated to ESG investing ($1.5 trillion in dedicated ESG funds and overall $30trillion) will force Indian companies to adopt ESG in their businesses. Additionally, the Indian businesses will need to be mindful of the fact that the concept of “Total Shareholder Return” is now quickly paving the way for “Total Shareholder and Social Return”.
Finally, foreign companies are increasingly being restricted to buy or source products from companies that do not comply with the norms, standards and parameters under the entire gamut of ESG-compliance. Hence, with India eyeing the spot of global outsourcing hub, the Indian companies that are supplying globally will need to change their practices and incorporate ESG in their business processes at war footing.
The author is Head Institutional Business, Reliance Securities