- Global funds have been diverting funds from China to India
- What does this mean for ESG funds in India?
- We look at the opportunity and problems ESG investors face in the country
Over the last couple of years, global investors have pulled billions of dollars from China’s sputtering economy, with much of that cash heading to India.
Hedge funds and asset managers all over the world have now positioned India as their next long bet.
Bloomberg reported that Goldman Sachs and Morgan Stanley have endorsed the South Asian nation as THE prime investment destination for the next decade.
But could all this momentum translate to a surge in ethical or ESG investments in the country?
According to a recent report from a Avendus Capital, ESG-focused equity funds in India have grown from US$330 million in 2019 to US$1.3 billion in 2023.
Despite the decent growth rate, the magnitude is only a tiny speck of the US$34 trillion the market predicts global ESG fundies will manage by 2026.
But there are signs that things could change soon.
For example, India is expected to issue US$3 billion of green bonds this year, which could encourage more green funds in the country.
Also, there is more understanding now about how ESG-focused companies could outperform their non-ESG counterparts.
“Companies with higher ESG scores find it easier to raise funds at lower interest rates,” Gaurav Sood of Avendus Capital told Economic Times.
“Cheaper access to capital leads to higher operating margins and shareholder returns,” Sood said, adding that ESG funds in India could grow by about 30% every year over the coming 5-10 years.
What’s hampering ESG investing in India?
While the concept of ethical investing in India is at least a decade old, it wasn’t until recent years that its growth rate has become somewhat relevant.
The slow uptake, according to experts, highlights the slow pace at which Indian capital markets and investors adopt new products – primarily due to investors not being aware of their fundamentals.
It’s also the result of cultural differences. For the average Indian investor, there must be some sort of virtues embedded in the stock or fund, if it was to be called ethical.
“Therefore, the major problem then is, how to apply ethical investing when there are varying definitions of ethics and ideologies?” said market expert, Kawaljeet Sygal.
Another headwind for ESG-focused products has been the global obsession with artificial intelligence (AI) – particularly stocks in that space.
“The rate of innovation around AI right now is explosive, and that should continue as a wide series of products are introduced and transformed,” said Gil Luria of D.A. Davidson.
Yet another thematic that’s distracting investors away from investing in ESG funds is the Russia-Ukraine and Israel-Hamas wars, which have resulted in a rally in defence and energy stocks.
Indian government supports ESG
Meanwhile, India’s government, for its part, has published new rules on ESG over the past couple of years to strengthen the sector.
The rules allow domestic fund managers to launch funds under six types of ESG strategies, which Bloomberg says includes “transition and transition-related” funds, with the “aim to invest in companies and issuers that support/facilitate environmental transition and just transition.”
The new rules also stated that at least 80% of total fund assets must be invested in equity-related instruments that align with the stated strategy.
Additionally, India’s market regulator has also mandated that the top 150 listed companies by market cap must provide “reasonable assurance” on their ESG metrics.
“While these norms will initially apply to the top 150 companies by market capitalisation, they will trickle down to the next 850 by the end of 2026–27,” said expert, Eddie Tsui.
What lies ahead then?
The National Stock Exchange of India (NSE) already has indices that track ESG-focused funds.
The NIFTY ESG, NIFTY ENHANCED ESG, and NIFTY SHARIAH are the most well-known ethically oriented indices on the NSE.
But whatever path ESG investing in India may take in the future, the concept has gained significant buzz and offers a promising avenue for investors.
“In the current context, as we navigate the new normal, ESG investing will undoubtedly assume a more prominent role, reshaping business practices in India and globally,” said a note out of trading hub, Shoonya.
“Continued efforts to enhance corporate disclosure and transparency will further strengthen ESG investing in India.
“Driving factors behind the rise of ESG investing in India include societal awareness and demand, regulatory support, investor expectations, financial performance benefits, and international influence.”