An emerging group of investors, globally and in
India, are looking beyond the customary financial
returns, and integrating Environmental and Social
(E&S) information in their investment decision
making. The advent of these investors and their
needs have been manifested in an increasing demand
for greater disclosure and reporting of E&S
information by businesses in India. However, E&S
information currently is both limited and scattered.
This background predicates the question: Can such
investors, which are using E&S information and
targeting India, find a standardized and reliable
means to get this information and make investment
decisions more effectively?
‘Cracking the Conundrum’ details
how investors can converge to crack the key
conundrum of standardization of E&S disclosure and
reporting: ‘a standard will get accepted only if it
has a large number of adopters, however adoption
will only happen if a standard gets accepted’.
As per the latest estimates developed by cKinetics,
these investors (referred to as Finance+ investors)
represent Rs 3 trillion ($55 billion) in India,
which is 1% of the world’s total responsible
capital. In addition to this, Indian and Global
banks are lending Rs 4.4 trillion ($80 billion) to
sectors, in which E&S factors are considered.
The report makes the case that as standardization of
E&S reporting occurs, investors that have adopted it
will increasingly interact amongst themselves. Their
Assets Under Management (AUM) is expected to grow
from Rs3 trillion ($55 billion) presently to Rs5.5
trillion - Rs9.6 trillion ($100 billion - $175
billion) in 5 years and forecasted to be at Rs13.2
trillion - Rs17.3 trillion ($240 billion - $315
billion) in 10 years.
The present AUM of Rs 3 trillion is largely held
with private equity providers like Social investors,
E&S funds, SRI funds and DFIs. In addition, another
Rs 4.4 trillion ($80 billion) of capital is being
managed by Indian and Global Banks, using the E&S
criteria. The table below depicts the capital
management of these investors.
Investors already using E&S measures
For this select group of investors alone, a 3X
increase in AUM is predicted within the next 5 years
on adoption of Standardized E&S disclosure and
reporting.
3X growth in AUM for Finance+ investors alone in
the next 5 years
Indian E&S disclosure policy is presently
amongst the most progressive globally: that will be
a key driver
During the course of the analysis undertaken for the
report, several groundbreaking voluntary and
mandatory E&S disclosure and reporting requirements
were announced and are presently making their way
into the mainstream. Several progressive policy
enactments made in this period, include, the
National Voluntary Guidelines for Social
Environmental and Economic Responsibilities of
Business (NVG-SEE), the mandate by Securities and
Exchange Board of India (SEBI) requiring the largest
businesses to file an Annual Business Responsibility
Report (ABRR), Guidelines on Sustainable Development
and Corporate Governance for Central Public Sector
Enterprises (CPSEs), and the work by the Institute
of Chartered Accountants of India (ICAI) in
developing a framework for sustainability reporting.
Indian E&S disclosure policies: progressive in
the global landscape
|
The business case: quantifying the financial impact of
E&S disclosure and reporting
In order to quantify the potential
financial impact due to a change in E&S disclosure
and reporting measures, a model has been developed
to link the two. The model takes a two step approach
in establishing the linkage:
Step 1: Identify linkage between the E&S
disclosure and reporting measures of an investment
opportunity (i.e. a business) and its financial
attractiveness. The business level information has
been aggregated to build a sector-level view on the
linkage between E&S disclosure and reporting and
financial attractiveness of the sector.
Step 2: Predict the change of capital flow and AUM
in different sectors on account of change in the E&S
disclosure and reporting.
Based on the above appoach, capital has been modeled
for the following sectors which are most impacted:
i) Business and consumer services
ii) Energy and
related infrastructure and
iii) Industrial
manufacturing and extractive enterprises
It has be estimated that, should adoption of
standardized E&S disclosure and reporting take place
in the above sectors, the amount of capital being
deployed by Finance+ investors would be at Rs 17.3
trillion ($315 billion) instead of at Rs 7.5
trillion ($136 billion) in the next 10 years.
Continuing developments in E&S disclosure
A prescriptive set of near-term recommendations also
emerged from the interviews conducted to propagate
standardized E&S disclosure and reporting, which are
as follows:
1. Need for an ongoing engagement platform that will
enable investors to converge
2. Requirement for a guidance document on how to
deploy a standardized E&S approach and how to
provide assurance Details on the projected path and
the estimated size of each of the investor types are
presented in Chapter 4 of the report.
3. Need to coordinate with policy and leverage
existing institutional frameworks to undertake
coordinated action.
This space continues to see active developments. In
order to engage with some of the follow-up
activities listed above, please drop an email to:
contact@cKinetics.com
+91.11.4050.7277
|
