SDGs, ESG and Impact Investing: The investments India needs to make for a sustainable future

As the World Economic Forum meets physically, Sustainable Development Goals (SDGs) and sustainable investing through a stronger focus on Environmental, Social and Governance (ESG) dimensions of corporations will be at the core of discussions. This article explores the interplay amongst SDGs, ESG and Impact investing and the kind of investments that the Indian government should focus on to build a more sustainable future for India.

SDGs are a collection of 17 interlinked global goals, such as no poverty, gender equality, quality education and sustainable cities, among others, set up in 2015 by the United Nations General Assembly and designed to be a “blueprint to achieve a better and more sustainable future for all”. The intent is to achieve these SDGs by 2030. Global partnerships such as government to government partnerships, public-private partnerships, and government and private sector engagement with civil society will need to be promoted to achieve the SDGs.

Within sustainable investing, there are various categories. ESG criteria are standards set by investors as their contribution to achieving SDG goals through their investments. Environmental criteria consider the impact of a company’s business on nature and the larger ecosystem. Social criteria examine how it manages relationships with its stakeholders, including employees, suppliers, customers, and the communities it operates. Governance deals with a company’s internal management keeping in mind best practices, their implementation through governance structure, internal controls, and robust and independent risk functions.

Impact investing is a further subset of ESG. There is no consensus on the definition of Impact investing. The common theme across various interpretations is a positive environment and/or social impact through the investment by the investor, with or without financial return. Therefore, while ESG is a framework for identifying non-financial risks that may have a material impact on an asset’s value, Impact Investing requires upfront identification of certain sustainability goals to be met by the investee company. Impact investors typically provide impact measurement tools to investee companies to track the positive outcomes of their investment.

Other than ESG and Impact investing, there is also Socially Responsible Investing (SRI), which lies between ESG and Impact Investing. It goes one step further than ESG by actively screening companies engaged with certain businesses, such as the production of alcohol, tobacco, or other addictive substances, defence equipment, or known to be involved in human rights and labour law violations, environmental damage etc. SRI screenings are typically used for public market investing.

The International Monetary Fund (IMF), in its Global Financial Stability Report (2019), recognises that socially responsible screening increases volatility, but the overall performance of sustainable and conventional funds remains comparable. The findings contrast with specific other results (Gasser, Rammerstorfer and Weinmayer, 2016), who, through an empirical analysis, demonstrated that investors choosing to maximise the social impact of their strategy face a statistically significant decrease in the expected return. There is no financial correlation between Impact Investing and SRI. However, they carry an intrinsic benefit of India coming closer to achieving the SDGs.

Climate Change Investment Research report by Deutsche Bank analyses 100 academic studies to conclude that solid commitment to ESG leads to lower cost of capital, equity and debt, and market-based outperformance.

As per Bloomberg Intelligence, ESG assets may hit $53 trillion by 2025, a third of global AUM, of which 69% is broad ESG, whereas only 36% is the environment, impact or other theme-specific. The Global Sustainable Investment Review 2020 reports that ESG integration is the most commonly reported sustainable investment strategy. This is followed by SRI.

However, the achievement of SDGs will require a focus on Impact Investing, similar to ESG. This gap in Impact Investing must be met through public-private partnerships. Already, pension funds and SWFs are lead investors across the globe as investors in Impact strategies. Governments need to find further innovative financial models to bridge the gap. In India, there are early examples of such innovation. Green Growth Equity Fund (GGEF), one of the largest climate change funds in the region, is anchored by NIIF, India’s quasi-sovereign wealth fund and the Government of the UK. The Fund’s investment thesis is to invest in sectors that support climate change mitigation and align the investments positively around SDGs.

In the budget in February 2022, the Finance Minister has proposed the setting up of thematic funds through blended finance that mixes public capital with market-based funds to mobilise additional commercial funding toward sustainable development. Both these measures by the Ministry of Finance need to be lauded and should be great examples for other countries to emulate for achieving UN SDGs by 2030 for a more sustainable future for all.

(The writer is Executive Committee member, Indian Venture and Alternate Capital Association (IVCA) and Head of Strategy & Group General Counsel, Everstone Group.)

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