Responsible Investing and Environmental Social Governance (ESG) is a global trend that has off late started to pick up the momentum in India. Unlike the developed world, ESG investment is still at a nascent stage in the Indian market. If one goes by the number of signatories to United Nations-supported Principles for Responsible Investment (UN PRI) as the proxy for the penetration of ESG investment in India, there are only two AMCs which are signatories to UN PRI namely SBI and Kotak Mutual Fund. In comparison, the developed world has hundreds of ESG funds in accordance with the principles of UN PRI. Indian market has slowly started to respond to the global trends as two ESG funds worth $1 billion each has been announced recently by Quantum Investors and Avendus.
Despite the increased environmental, social, and governance (ESG)-focused conversations and growing interest of various stakeholders towards responsible investing, there are quite a lot of challenges that hinder its overall progress and wide adoption in the developing market like India. Firstly, there is a lack of clarity and understanding among the investors and other stakeholders about the ESG terminology. Secondly, there is a lot of inconsistency in the ESG ratings due to the differences in data collection, analysis and rating methodology by the ESG rating firms. The lack of reliable and standardized metrics to adequately measure the ESG factors results into discrepancy among the comparability of different firms. Thirdly, the quality of ESG information should be adequate and to the point. Too much of the ESG related information leads to information overload and creates a bid data problem. Fourthly, the role of ESG in other investment markets such as private markets is a big concern due to the inadequate disclosures and lack of availability of data.
In developed world, both individual as well as institutional investors are very active as far as ESG and responsible investment is concerned. In order to satisfy the demands from investors, asset management companies are frequently factoring in new products. Moreover, the awareness amongst investors has been created by media, regulatory bodies and various institutions. However, if the same level of awareness has to be created in India then asset management companies themselves will have to take the lead. So the scenario is just the opposite of the developed world in a developing economy like India. Though the SBI Mutual Fund has initiated the process to make the investors aware about the merits of ESG investment, but media will have a major role to play in creating mass awareness amongst investors in India. In all, it is the collective responsibility of the Indian Institutional Investors like mutual funds, banks and insurance companies to take up a leading role in embracing the concept of ESG investment philosophy into their investment decisions.
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