Global North Should Curb Emissions: Nilesh Shah

As we understand it today, the concept of sustainability began to take shape during the 1970s and 1980s. The first major United Nations conference addressing environmental concerns was held in 1972. After various accords, protocols, and COP summits, the term “ESG” (Environmental, Social, and Governance) was officially coined in 2004 by the United Nations Global Compact in its Who Cares Wins report.

Since then, the ESG landscape has evolved significantly—governments, the private sector, and investment firms have adopted various ESG practices—redefining energy and sustainability within broader business frameworks.

With the concept of ESG evolving from the Western world, it has been noted that ESG definitions were often coined to suit Western interests without taking into account the challenges of implementation and relevance in developing countries. While ESG aims to promote sustainability and responsible business practices, its implementation in emerging markets often comes with significant social and economic costs. Applying the same standards to both developed and emerging markets without contextual adjustments can often be counterproductive.

Furthermore, in the developed world, the definition of what is acceptable as an ESG practice often changes. This has been seen recently in the case of investments in the defence sector. Sectors like defence—once on the negative screening list—are now being rebranded under the ESG umbrella, due to the current geopolitical and energy demands.

A similar trend is seen in the case of nuclear energy. The surge in demand from tech giants who are investing heavily in nuclear energy to power their data centres has also led to a rethink on investments in nuclear energy from an ESG standpoint.

This leads us to the importance of establishing our own standards for ESG, tailored to our unique context. In the Indian context, the evolution of ESG norms reflects a growing recognition of the importance of sustainable and responsible business practices. India is charting its path by integrating ESG principles into its sustainable development framework. Our country has recognised the differences between ESG, sustainability, and climate change, and is laying the foundation for a developing-world-centric model through its Viksit Bharat 2047 vision.

A key regulatory development for mainstreaming ESG in India was the introduction of the Business Responsibility and Sustainability Report (BRSR) which was introduced by the Securities and Exchange Board of India (SEBI) in 2021 as a replacement for the Business Responsibility Report (BRR). With the mandatory reporting for the top 1,000 companies by market capitalisation under the BRSR guidelines, there is a transition from viewing ESG as compliance to a core business strategy for many companies.

The Reserve Bank of India (RBI) also proposed a draft requiring banks, financial institutions, and large non-banking financial companies (NBFCs) to disclose climate-related financial risks. Additionally, the RBI suggested creating a pool of bankable climate projects and announced an 'On Tap' cohort for climate change risks and sustainable finance under its regulatory sandbox initiative.

Regulatory bodies like the SEBI and RBI are also taking climate action measures. India ranks among the top three countries globally in setting and reducing carbon emission targets, trailing only China and Brazil. India has committed $386 billion to expand renewable capacity, aiming for 500 GW of non-fossil power by 2030.

While the emphasis on climate is important, given the stage of growth and development in India, we believe that the focus within ESG should be more on governance, followed by social aspects, and then environmental ones. This hierarchy is essential for ensuring a balanced and comprehensive approach.

Governance is especially pertinent for India, where many promoter-led companies adhere to management best practices and uphold strong governance standards. Additionally, Indian companies have begun to recognise the value of stewardship and investor voting, taking on more active roles in ESG-related actions. Over time, organisations that have invested and focused on the ‘G’ aspect of ESG have been rewarded with stakeholder trust.

What is also crucial is for India to champion a New Delhi Accord, akin to the Montreal Protocol (which India was also a part of). Under that agreement, India successfully phased out ozone-depleting substances. A similar accord is essential today to ensure that developed nations are held accountable for their disproportionate share of carbon emissions, on a per capita basis. The New Delhi Accord could differentiate itself by acknowledging and incentivising the efforts of developing countries in maintaining low greenhouse gas emissions. India could be a bridge between developing and developed countries. India also has credibility as it met Paris targets early and is expanding in renewables.

Back home, Kotak Mahindra Asset Management Co Ltd (KMAMC) was the first Indian asset management company to adopt the principles of responsible investment. While in India there is a category for ESG schemes under the mutual fund umbrella, the acceptance of the same by investors in India has been patchy. It's important to note that investors will only embrace ESG funds when the returns are comparable to regular funds.

Therefore, ESG should not merely be a box-ticking exercise, it must contribute to real, inclusive development.

The author is MD, Kotak Mahindra AMC. Views are personal.