The rise of sustainable investing

The OECD-UNDP Framework for SDG Aligned Finance, presented at the Paris Peace Forum, identifies solutions to shift the trillions of dollars available internationally towards more sustainable and resilient investments and to further mobilize investment, especially to least developed countries, small islands developing states, and developing countries.

With an expected USD 700 billion drop in external finance to developing countries this year, the financing needed to meet the Global Goals is at risk of collapse, threatening decades of progress on poverty alleviation and sustainable development. But trillions of dollars available in the financial system could be better aligned with SDGs to curb this trend, considering that the financing gap to achieve the SDGs –around USD 2.5 trillion per
year– barely represents a small fraction of the global financial assets, including cash, bank deposits, bonds, stocks, etc.

In India, the government is accelerating the movement towards the SDG’s by funding large projects that contribute to the creation of a better world in the areas of health, innovation, sanitation and water. The national investment promotion and facilitation agency, Invest India focuses on sector-specific investor targeting and development of new partnerships to enable sustainable investments in India.

The Swachh Bharat Unnat Bharat Abhiyan, set up under the Prime Minister’s Science, Technology & Innovation Advisory Council, is an initiative by the Office of the Principal Scientific Advisor to the Government of India (the O/o PSA) that will leverage global technological capabilities to create socio-economic benefits for 1.3 billion Indians by addressing the issues of waste disposal, deteriorating air quality and increasing pollution of water bodies.

The Government of India has also launched a large scale water project called ‘Jal Jeevan Mission – Har Ghar Jal’ that aims to provide tap water supply to households with special focus on women and children by 2024.

However, the role of private funds in this space cannot be undermined. Growing concerns around climate change are making stakeholders demand accountability and transparency in how companies are assessing the likely
environmental impacts and identifying options to minimise environmental damage. Several large banks and fund houses are realising that their definition of what is financially relevant needs to involve environmental, social and governance (ESG) factors. These issues are now becoming critical in investment decision-making. Investors are incorporating these to reduce risk and seize opportunities by fine-tuning equity exposures, searching for excess returns, remaking bond portfolios and tapping the green bond market. ESG represents about one-quarter of all professionally managed assets around the world.

In India, ESG investing is still a fledgling industry. However, ESG-based investing is a theme that we anticipate is here to stay. With investors and regulators alike coming to terms with the adverse impacts of climate change and unsustainable business practices, non-financial factors are coming to the forefront, and most companies will have to align to this or risk being uncompetitive.

In 2020 the momentum has grown as the pandemic has highlighted the importance of responsible, environmentally friendly growth. Further, there are increasing demands for a green recovery the world over. Customers have also become more informed and have started actively looking for sustainable products and companies that treat their stakeholders well. At the same time, investors are increasingly investing in ESG funds and the volumes of these funds have skyrocketed. It has been shown that companies that rank high on ESG provide higher returns and tend to have lower cost of capital.

Once considered a niche market for institutional clients with specialised investment needs, ESG investing has gone mainstream. It now spans multiple asset classes and is used by a diverse group of investors. We have
tracked ESG over the seven years of our study and it indicates that companies are putting significant efforts to improve their performance.

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