Can India become a hub of sustainable financing?
Increasing consumer demand for socially responsible brand behaviour, government policies and the massive growth of cleantech and green initiatives are together encouraging and pushing sustainable investment ventures in the country.
Increasing consumer demand for socially responsible brand behaviour, government policies and the massive growth of cleantech and green initiatives are together encouraging and pushing sustainable investment ventures in the country. Mind you that the current state of affairs with regard to sustainable investments in India is still nothing to write home about. While investments in sustainability account for one-third of assets under management (AuM) in the United States (US) and 36 per cent of AuM globally, the Indian sustainable investment space only makes up 10-15 per cent of AuM, by private equity (PE) and venture capital (VC) firms currently. However, growth in space is quickly gaining momentum, thanks to the above mentioned factors. Significantly, sustainable investments by Indian PE and VC firms are projected to grow to $125 billion by 2026, at a 5-year CAGR of 46 per cent. By then, it is also estimated that sustainable investments would make up 40 per cent of AuM by Indian PE and VC firms, which is above the current US standard.
When it comes to India, the sectors attracting the most sustainable investments include renewable energy, agritech, e-mobility and waste management. E-mobility especially has been of interest to PEs and VCs, with investments into the sector doubling between the period of 2019-2022. Within the next five years alone, the electric vehicle market in India is projected to attract investments worth Rs. 94,000 crore. One therefore has reasons to be optimistic about the prospects of sustainable investments in the country.
Companies across sectors have started to realise that to follow ESG practices is not expensive, it requires diligence, hard work, and in the long run is very rewarding for the company, employee and investor. And as a result, companies across all sectors are now moving towards strengthening their sustainability parameters. The consideration for sustainable practices within businesses when making investments is also rising. Stakeholders are becoming more cautious of the outcomes of their investments, preferring to invest in companies with greater sustainability interests.
Various recent studies suggest that investors, on their parts, have increasingly begun to recognise that just financial metrics are not enough. The focus is shifting towards investing into businesses that provide not only good returns but also sustainable returns.
While these are certainly very positive and encouraging facts, one has to keep in mind that India's progress on this front could have been much higher. There are more issues than one which have been and still are plaguing India's sustainable investments such as lack of quality data, measurement criteria, a traditional mindset, a limited record of sustainable funds, and a lack of awareness. The talent pool with knowledge in the areas of ESG/sustainability is limited, and it is not growing at the same rate as the demand for support for long-term investment.
To strengthen ESG practices and reduce the reluctance towards sustainable investing in the country, there should be significant regulatory push and guidance asking for disclosures that must be supplied in a timely manner.