MUMBAI: ESG (Environmental, Social, and Governance) funds, focussing on sustainability, has been gaining traction world wide, including India. However, the country’s ESG assets under management (AUM) lag global peers.
As of June, India’s ESG AUM stood at $1.5 billion, accounting for 2% of Asia-Pacific ESG funds AUM, according to EPFR data. This compares with India’s share of 10% in overall APAC AUM.
The number of sustainability funds in India also accounts for only 2% of the Asia Pacific total, trailing most other Asia Pacific regions in 2021.
However, interest and activity in ESG is increasing, according to Morningstar data. Net inflows into sustainability funds jumped 80% year-on-year $510 million in FY21.
“Energy transition stands out as a key environmental theme, corporate social responsibility (CSR) is encouraged although social development poses challenges; India shares emerging markets’ governance risks but is striving for reforms,” said Morgan Stanley.
According to an analysis by Morgan Stanley, Indian companies are subject to mandatory ESG disclosure regulations, leading to high ESG disclosure rates but international guidelines have not been widely adopted. These include overarching guidelines on responsible business conduct, coupled with a Business Responsibility and Sustainability Report (BRSR) framework which guides corporate disclosure.
“Nonetheless, less than half of MSCI India constituents have adopted international reporting guidelines,” said Morgan Stanley.
Being one of the earliest Asian countries to impose a board gender quota, India had introduced many regulatory-driven corporate governance reforms, but covid-19 has delayed progress in governance. For example, the requirement to separate chairman and chief executive has been delayed to April 2022 (from April 2020).
India accounted for 7% of global carbon emissions in 2019 and is vulnerable to physical risks from climate change, as well as risks to water supply. Morgan Stanley sees energy transition as the key theme in India along with the announcement of ambitious environmental targets related to its energy mix, as well as initiatives related to electric vehicles, air pollution, energy storage, etc. “We are waiting for India to update its Nationally Determined Contributions (NDCs), but net zero targets might not be likely,” it said.
In a joint statement with other Quad members–Australia, India, Japan, and the United States–India said all members intend to update or communicate ambitious NDCs ahead of COP26. India is also likely to stress the need for sustained finance and technology transfer from developed countries.
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