ESG country profile: India

ESG started taking off in 2018, but a banking crisis could hinder growth

One of the big problems facing responsible investors globally, according to Ajit Dayal, is that they are mired in what he calls "an archaic 20th century asset allocation framework that is trying to solve a 21st century problem".

Dayal is the Founder of Quantum Advisors, which last year launched one of India's first ESG funds. The emergence of such funds in India started in 2018 and momentum continues to build. Alongside two funds from Quantum Advisors, there are now offerings from Mumbai-based SBI Fund Management, and Axis, one of India's largest banks. Fund houses including ICICI Pru, DSP, Aditya Birla and Kotak are reportedly waiting for regulatory approval to join the ranks too.

Dayal, who is seeking to raise over $1bn for Quantum Advisors’ ESG funds, says there is a lot of talk amongst international pensions, endowments and foundations about ESG investing, "but institutional money has a problem with allocating capital to solve global challenges such as climate change".  

He suggests asset owners should create a "save the world" bucket, eschewing traditional silos of asset class and geographical allocations. 

"They review the investment decision as an 'India allocation'," Dayal explains. "They may already be 'overweight India' thanks to their global emerging market manager having a large list of India stocks in the portfolio, so the institution cannot take on anymore India exposure. When, in fact, they have just passed over an opportunity to help the targets of the Paris Climate Accord being met."

Climate and the environment

India is the fifth most vulnerable country to climate change, according to the Global Climate Risk Index 2020. Prime Minister Narendi Modi's environmental record is considered sketchy, but an ambitious commitment to solar energy has attracted investor attention over recent years.

India also faces water-stress, and the government’s efforts to tackle this represents an investor opportunity, explains Manish Jain, Co-Founder of India-based ESG advisory firm Envint. "The Ganges River Water Cleaning Programme is a $4bn programme, and there has been a revival of private-public partnership projects in the water sector because of this. There are seven PPPs recently awarded for sewage treatment." Another 21 are in the pipeline

When it comes to capital markets, India is one of the biggest emerging economies for green bond issuance, with $10.3bn of transactions in the first half of 2019, according to the Economic Survey 2019-20. A number of government agencies contributed to the issuance including the Indian Renewable Development Agency and Indian Railway Finance Corporation. 

Shantanu Jaiswal, Head of India Research at Bloomberg New Energy Finance, suggests the figure for green bond issuance is likely much higher, as many renewable energy companies and other "pureplay" firms issue unlabelled bonds. "Their sole bread and butter is generating renewable energy to sell to the grid. There are also green banks who only lend to renewable projects, and currently there is no advantage for them to get green bond certification."

India is in the midst of a banking crisis, after a period of bad credit and non-performing loans. Significantly, Yes Bank, one of the largest lenders to India’s renewable space, has gone into administration. It comes at a time when renewable developers in the country are starving for capital. 

"Most renewable energy financing in India has in the past few years come from shadow banks," says Abhishek Bansal, Mumbai Director at private equity firm Actis. "India needs to do more to make sure easier financing is available. More domestic banks need to step forward and participate in this financing. India also needs to develop its local bond markets more so developers can raise money through cheaper bonds, relatively." 

India’s problem with non-performing loans is not new, says Vipul Arora, a Director at ESG ratings firm Sustainalytics, and will hamper its renewable energy efforts if not tackled. "It’s hidden away in the background. For two decades now there has been a lot of defaults following a big expansion strategy. There are a lot of initiatives and programmes in place but the country is yet to realise an increase in productivity measures."

The impact of this is felt particularly where funding is really necessary. Large Indian banks prefer to back established names over start-ups in the renewable sector. "Thus barriers to entry are high, and banks don't take into account climate change in risk assessment – or even the Equator Principles [international environmental and social risk standards on banking]," says Arora.


There are efforts, however, to move Indian corporates closer to international standards on sustainability. Envint’s Jain explains: "SEBI [the Securities and Exchange Board of India] recently extended the mandate to publish Business Responsibility Reports, which it launched in 2012, to the top 1000 Indian companies, representing around 99% of market cap of India". 

"These are steps in the right direction, though still a watered down version of key global reporting standards," he adds. "In 2018, the Bombay Stock Exchange – the oldest and one of two major stock exchanges in India – published a guidance document on ESG disclosures; a set of voluntary recommendations based on global sustainability reporting frameworks."


And international investors have waded in, too. Swedish investor Nordea led engagement with the Indian government to act on water pollution from pharmaceutical companies, resulting in the Ministry of Environment, Forest and Climate Change publishing a draft bill to limit concentrations of antibiotics discharged by pharma factories into waterways.

But Arora points out that it is India's national pension and insurance industries that offer the most significant opportunities for moving the needle on sustainable finance. "There is so much capital there. What we need urgently is more openness and imagination around the use of ESG factors to invest that capital. That will lead to the creation of higher-quality companies in the long run, which leads to long-term economic prosperity for all. The need for high-quality companies becomes even more clear in times of crises like the one created by Covid-19 at the moment. Such companies are more resilient than others in facing any crisis."

Jain adds: "India's pension funds began their exposure to equities as an asset class in 2015 and can currently invest up to 15% of their corpus through ETFs; so for such long-term capital, there is still quite some way to go".

Neha Bhatnagar, Head of Partnerships and Research at India’s Impact Investors Council, which seeks to encourage private capital into sectors such as healthcare, water & sanitation and education, to create social and environmental impacts, told RI that, between 2010 and 2019, there had been "around $10.5bn mobilised in 520 impact enterprises impacting close to 170 million people". 

A focus on gender

In 2014, the philanthropic arm of UBS bank, known as UBS Optimus Foundation, put $270,000 into a first-of-its-kind development impact bond, focused on female education in India. The three-year "proof of concept" project saw NGO Educate Girls deliver a teaching programme in Rajasthan, with the Children's Investment Fund Foundation (set up by hedge fund executive Chris Hohn and his former wife Jamie Cooper) agreeing to pay Optimus back its principal investment, plus a return, if the bond met measured outcomes. The foundation recouped its investment with a 15% return, and the project has helped Educate Girls scale its work to 35,000 villages over five years. 

The innovation paved the way for more outcomes-based transactions, says Safeena Hussain, Director of Educate Girls, who points to another project for education and "a few in healthcare", as well as an India Education Outcomes Fund launched by impact group Social Finance India.

Shantanu Ghosh, CEO of Social Finance India, says it wants to scale up the pay-for-success market for education significantly over the coming years by working with philanthropy, corporates (acting as "outcome payers" through their CSR budgets) and investors seeking to provide risk capital. 

"India deals with big numbers of students in very low socio-economic situations. The Indian government introduced a Right to Education Act through which access to education has been significantly enhanced, but the quality of learning outcomes remain poor," says Ghosh. "And that is why focused intervention for improving learning outcomes is the need of the hour, and can be scaled up with innovative financing."