Vijay Agrawal Executive Director Equirus Capital “The growing participation of Indian companies in climate initiatives has spurred investment from leading PE funds or Oil and Gas majors in the renewable energy companies of India and ancillary industries like EPC and solar panel manufacturing companies.” — Vijay Agrawal Environmental, Social and Governance (ESG) investing refers to the investment theme which prioritises outcomes that will impact these three factors. It is widely seen as a way of investing in sustainability and where the outcome of investment will contribute towards the greater well-being of the environment and socially weaker sections of the economy. It is based on the assumption that companies solving the world’s biggest challenges can be best positioned to grow. Boom in ESG investment In recent years, sustainable investment has become a major force in shaping global capital markets and in turn is influencing companies seeking to raise capital in those global markets. This is reflected in the AUM of $35.3 trillion that sits in the sustainable investment funds worldwide. In the US markets, as of April 2022, at least 20 ESG-focused ETFs (Exchange Traded Funds) have been launched, compared to nine from the same period in 2021. Therefore, investors are looking to fund companies that aim to become carbon neutral and promote sustainability. Emerging ESG investment themes As per a recent survey of investors, the top five ESG investment themes that have guided ESG investments across the Globe, in their order of preference are as follows: 1. Renewable energy and energy efficiency. 2. Cyber security and data privacy. 3. Climate change adaption and mitigation. 4. Pollution prevention and control. 5. Sustainable water and wastewater management. The investments based on the above themes vary across geographies in terms of available opportunities and the risks that are profound in certain geographies as compared to others. Investors from the Asia Pacific have shown higher interest in renewable energy and energy efficiency as well as climate change adaptation and mitigation. ESG investments in India In 2021, at the 26th Conference of Parties (COP-26) held in Glasgow, PM Modi announced that India will achieve net zero emissions by 2070. The PM also announced that India will raise its non-fossil energy capacity to 500 GW by 2030 and meet 50 per cent of its energy demand through renewables. Apart from this, India has also committed to reducing its 1 billion tonne of projected emissions from 2021 to 2030, achieving a carbon intensity reduction of 45 per cent by 2030. To achieve these climate goals along with development priorities, India needs to integrate ESG elements into its investment decision-making processes. While ESG investment in India is still at a nascent stage, given the tall task of achieving its climate goals, it will evolve at a fast pace. As of August 2022, the total installed capacity of electricity generation from renewables in India stands at 116 GW, roughly 1/5th of the total committed capacity by 2030. Therefore, there is a massive need for investment in building green energy capacities and resultantly expected to remain the focus area for ESG investments in India. To support the government’s aim of achieving its COP-26 commitments, India Inc has also undertaken several sustainability initiatives. One such initiative has been the participation of Indian companies in the RE100 global movement, which urges corporations to go green. Companies like Tata Motors, Mahindra & Mahindra, Infosys, and Dalmia Cement have voluntarily adopted 100 per cent renewable electricity consumption targets by joining this initiative. These initiatives have led to Indian corporates tapping the renewable energy market and entering into corporate PPAs for offtake of renewable energy. India Inc is actively participating in the Carbon Disclosure Project (CDP). As per the data disclosed under the CDP, there has been a steady rise in climate actions and commitments taken by Indian businesses. In 2021, 88 Indian companies disclosed information across CDP’s three themes – climate change, water security and forests. This is a healthy 28 per cent increase YoY as compared to 2020 when there were only 69 companies. The growing participation of Indian companies in climate initiatives has spurred investment from leading PE funds/Oil and Gas majors in the renewable energy companies of India and ancillary industries like EPC and solar panel manufacturing companies. The below table provides details on some of the recent marquee deals and investments. Apart from the M&A and PE deal-making, to invest in the Indian Public markets from an ESG perspective, there are currently nine Mutual Funds, with an AUM of about `113 billion. Considering the ESG focused funds are still in relative infancy, the investment approach to determine the underlying ESG value of these companies varies significantly across the funds. As of November 2021, the number of stocks held in the portfolio of these funds varies from 23 to 54. The portfolio of these funds also includes stocks from carbon intensive sectors like oil and gas. One reason for such variation is no underlying standard benchmark to assess the ESG score of these companies. SEBI’s BRSR (Business Responsibility and Sustainability Reporting) mandates companies to make disclosures. However, there are issues with definitions that makes comparison difficult. Therefore, interpretations of these disclosures are somewhat subjective and varies across funds. Given, the growing importance of ESG in emerging economies like India, it is expected that over a period of time these benchmarks will become well-defined and lead to growth in ESG investing. Conclusion It is expected that ESG investment will take a leading seat in the PE industry and many new ESG-focused funds will be launched. Many funds are scouting for deals in environment protection, wastewater management, reduction of energy consumption, and carbon capture. Renewable energy generation has taken the front lead in ESG investment and driving most of the investment. Now corporates are targeting Green Hydrogen to reduce carbon emissions. ESG investment will focus on carbon emission reduction, wastewater management and environment protection. This will help in achieving global targets of emission reduction and climate protection. About the author Vijay Agrawal, Executive Director, Equirus Capital, heads the infrastructure and real estate practice at Equirus with more than 25 years of professional experience. He has completed multiple transactions in the infrastructure sector and has advised clients in all sectors with a focus on infrastructure and real estate. He has been involved in more than 150 M&A transactions as part of Big four Due Diligence team. Agrawal is on the Editorial Advisory Board of Construction World Magazine.