Socially Responsible Investing (SRI) in India

Socially Responsible Investing (SRI) combines investors\' financial objectives with their concerns about Social, Environmental and Ethical (SEE) issues. SRI takes care of the financial risk and return along with non-financial factors that could materialise into future risk or growth opportunities (CFA Institute, n.d.). SRI has grown tremendously in the last two decades and has emerged as a global key investment trend. Responsible Investing has been a part of the Indian knowledge system. Indian ancient scripts like the Vedas, the Upanishads, the Ramayana, and the Bhagwad Gita discuss the provision of social good, co-existence with nature, and sustainability of economic activity (Kar & Kaur, 2023). In modern India, SRI is still in the nascent stage and investors are not fully aware of the concept in comparison with developed countries (Murugaboopathy & Dogra, 2021).

The last decade has been very crucial for the growth of SRI, as India witnessed economic downturns, climate change and the COVID pandemic. ESG investing has gained momentum in India with the debut of dedicated ESG Funds and asset management companies signing up for UNPRI principles. There are 39 signatories of UNPRI from India; of these, 12 agreed in 2021, 7 signed in the year 2022, 11 nodded in 2023, and 1 joined in 2024 (UNPRI Website). By 2051, the ESG-based assets are expected to be 34% of the total domestic AUM (Avendus Capital, 2023).

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have launched various indexes to help investors identify firms that are committed to sustainable business practices. These include the BSE-Greenex, the BSE-Carbonex, the BSE ESG Index, the Nifty 100 ESG index, the Nifty 100 ESG enhanced index and the Nifty 100 ESG Sector leaders. Several Non-Banking Financial Companies (NBFCs) have also launched mutual funds based on an ESG Investment Strategy.

Table 1: ESG Mutual Funds in India

The first ESG-focused mutual fund in India was SBI ESG Exclusionary Strategy Fund catapulted in 2013. Post 2021, no new mutual fund was launched dedicated to the ESG criteria until WhiteOak Capital ESG Best-In-Class Strategy Fund was launched in the year 2024. Presently, there are 10 sustainable funds in India, with 9 being actively managed and one passively managed. SBI ESG Exclusionary Strategy Fund holds nearly 50% of the total AUM of such schemes.

Evolution of ESG Reporting in India

The evolution of ESG reporting in India can be traced back to the first decade of the 21st century when the government introduced policy reforms for greater inclusion of ESG parameters in corporate practices.

• In 2009, the Ministry of Corporate Affairs (MCA) introduced the National Voluntary Guidelines (NVGs), advising business houses to establish Corporate Social Responsibility (CSR) centres.
• In 2012, SEBI mandated the top 100 listed companies based on market capitalisation to publish a Business Responsibility Report (BRR) along with annual reports.
• In 2014, India became the first country to legislate Corporate Social Responsibility (CSR), requiring specific companies to spend 2 per cent of their average net profits of the preceding three years on CSR.
• In 2015, the BRR was mandated for the top 500 listed companies, and in 2019, extended to the top 1000 listed companies.
• In 2019, MCA issued National Guidelines on Responsible Business Conduct (NGRBC) to align with Sustainable Development Goals (SDGs).
• In 2021, SEBI introduced mandatory filing of the Business Responsibility and Sustainability Report (BRSR) by the top 1000 listed companies from the financial year 2023.
• In 2023, SEBI announced \"BRSR Core\", a subset of BRSR containing Key Performance Indicators (KPIs) across nine ESG aspects, mandatory initially for the top 150 listed companies for FY 2024.

In addition, SEBI has unveiled six new strategies in the ESG scheme/theme under which mutual funds can offer investment avenues: exclusion, integration, best-in-class & positive screening, impact investing, sustainable objectives, and transition or transition-related investment. Mutual fund schemes must invest a minimum of 80% of the total AUM of the ESG scheme in equity aligning with the outlined strategy. SEBI has also established an ESG disclosure and compliance framework and made India the first nation globally to regulate ESG rating providers and define their qualifications.

Total AUM of ESG Funds in India

The fund size of ESG mutual funds was INR 27.03 billion in 2019, quadrupled to INR 94.11 billion in 2020, and peaked at INR 123.69 billion in 2021. In 2022, the total assets fell to INR 107.41 billion, then to INR 106.35 billion in 2023, before rebounding to INR 120.79 billion in 2024. Cash inflows peaked in 2021 when 6 new schemes were launched, but 2022 and 2023 witnessed cash outflows, possibly due to profit booking and the Russia-Ukraine conflict surging non-ESG stocks like defense, oil, and gas.

India has also moved a step ahead by introducing the concept of Carbon Trading, wherein the central government or authorised authority issues \"carbon credit certificates to entities that are consuming less energy in comparison to the threshold allotted to them\". India stresses the utilisation of non-fossil energy sources and promotes clean energy with the Energy Conservation (Amendment) Act, 2022.

Shareholder Activism and Impact Investing

In addition to ESG integration, shareholder activism is a popular SRI strategy in India. Shareholders exercise voting rights, engage in publicity campaigns, litigation, and direct negotiation to pursue management changes. The rise of shareholder activism is attributed to legislative changes enhancing minority rights, greater institutional ownership, landmark judiciary judgments supporting shareholder rights, and the introduction of e-voting.

Interest in impact investing has expanded substantially. In the last five years, deals with more than USD 0.01 billion have more than doubled. Impact investing has generally taken the form of venture capital in India.

Table 2: Impact Investment in India for 2021-2023

In 2021, India witnessed the highest equity investment. The year 2022 observed fewer big-ticket transactions but 400 impact-focused enterprises raised USD 6 billion across 431 transactions. In 2023, 275 Indian impact companies received USD 2.9 billion in equity investment across 290 transactions, marking a significant decline mirroring the global venture capital market slowdown. Despite this, the Indian impact ecosystem remains resilient with strong growth in early-stage investments, though there is a need for more financing in later stages.

Conclusion

In comparison to the developed world, SRI is still in the early stages in India and faces teething problems. However, popularity and awareness about SRI are rising. The Government along with market regulators and the central bank have initiated several measures to promote responsible investing and to protect investors\' interests, envisaging the embedding of sustainability in a company\'s vision, mission, ethos, principles, and culture across all levels.