Institutional investors, who always focussed on G (governance), are now increasingly engaging with investee companies on the E (environment) and the S (social) part

Illustration by Siddhant Jumde Illustration by Siddhant Jumde

In March, Hero Future Energies, the renewable energy venture of the Hero Group, received an overwhelming response for its overseas green bonds with investors pouring in over $3 billion for expansion of its renewable energy portfolio abroad as well as in domestic market. The six-year maturity money was raised from insurers and institutional funds at a coupon rate of 4.25 per cent.

Another renewable energy company, Hyderabad-based Gre- enko Energy Holdings, mobilised close to a billion dollars through green bonds for refinancing its debt. Though renewable players are finding acceptance amongst global investors, Indian issuers are a bit slow in tapping the huge global pool of green investors.

In fact, large institutional investors like sovereign and pension funds investing or present in Indian listed companies, are taking up the ESG (Environment, Social, and Governance) agenda very seriously. The Indian journey of raising money from green investors is very new. Some six years ago, the Export-Import Bank of India (EXIM Bank), the premier export finance institution, was the first institution from India to test the global market for raising India's first foreign currency green bond offering. Today, the corporate sector, mutual fund industry, private equity, and venture capital all have some plans to tap the green market and make efforts to help companies build a sustainable business model.

Barely Scratching the Surface

Data for the last 6-7 years shows India has barely scratched the surface. Corporates and institutions like Indian Railway Finance Corporation, SBI, Renewable Energy Development Corporation, EXIM Bank Renew, CLP Wind Farms, etc. have mobilised close to $10 billion whereas a mere $1.45 billion has been outstanding on rupee-denominated green loans. Global data shows that there are about $1 trillion of green bonds outstanding as of March 31, 2020.

"This market has been growing at a remarkable rate. India has not tapped the green bond market fully," says David Rasquinha, Managing Director and Chief Executive Officer of EXIM Bank, the largest issuer of foreign currency bonds from India.

"In the last 3-4 years, from the Indian perspective, pension and sovereign funds have always wanted a very clear articulation of what is the E strategy of the investee company. And many are saying that even on existing investee companies, they want a clear strategy. 'E' has become a value enabler," says Sanjeev Krishan, Chairman, PwC in India. PwC on its part is focussing extensively on ESG reporting, strategy and transformation.

Typically, there are very few pure green investors globally, but big investors with global operations have green divisions. "Most of the green bond offerings (nearly 40 per cent) is taking place in Euros followed by the US, China, and other countries. There is great interest in Europe on green. Perhaps, they are leading the way when it comes to green outcomes," says Rasquinha of EXIM Bank. "Internationally, there are a lot of funds chasing active cleantech," agrees Manish Chourasia, MD, Tata Cleantech Capital Limited. There are multilateral institutions and climate investors who have a mandate to invest in green. There are many companies in the clean energy space raising funds directly in the overseas market.

In the syndication space, there are also some public sector banks that do participate. Foreign banks have also started showing interest and have come out with innovative solutions like money invested in one project, it goes to another project when the first project gets commissioned. There are some NBFCs like REC, IIFCL, and infrastructure debt funds that are also active. Foreign banks are gradually increasing their net. HSBC India, for instance, is providing Green Loans in renewables, infrastructure, and logistics sectors and assisting in raising capital from international bond markets through specialised instruments like Green Bonds. There is some domestic interest from infrastructure financing and debt funds in solar, wind, and hydro. But there is not much interest from capital market investors like pension and insurance.

Small Bites

In India, there is a large corporate sector, which could tap the low-cost green market for funding. Similarly, mutual funds, private equity, and venture funds industry also have a platform to raise resources both domestic as well as global for funding ESG-compliant companies. But there are not many examples of the Indian corporate sector where a clear strategy spelled out for decarbonisation.

Experts cite global examples of companies walking the talk. German automaker Volkswagen Group, for example, which faced an emissions scandal some six years ago, has set a target of complete decarbonisation by 2050. The plan includes sustainable carbon dioxide cuts and use of renewable energy sources. Volkswagen, which is transforming to battery-powered cars, has plans to set up half a dozen battery-cell factories in Europe in the next decade. Experts suggests the company is making serious efforts to overtake competitor Tesla. Volkswagen Group's stock is already reacting positively on the stock market.

Indian companies, too, need such a credible plan and commitment, to sell their stories globally. "There are large Indian companies in each sector making efforts to be ESG-compliant. In cement, Indian companies are far better than global counterparts in terms of environment, waste management, power, social welfare, etc. They are continuously working on their process to improve," defends Chirag Mehta, Senior Fund Manager (Alternative investments) at Quantum Asset Management. Chourasia of Tatas says investor interest is picking up in solar and wind. "It is rising in solar rooftop, electric cars with some incipient interest in even clean hydrogen and city gas distribution. There is also interest in waste to energy," he says.

Some mid-sized corporates are also cautious because of currency risk in global fundraising. "Hedging is a big issue in many cases. You are always caught between low coupons and exchange risk," says EXIM Bank's Rasquinha. Revenues of Indian renewables companies are rupee-denominated while the interest outgo or liabilities is in foreign currency. Bankers say there will always be an assumption of the break-even level of exchange rate tolerance. "If there is a rupee depreciation by 4-5 per cent by a year, this will create some trouble for Indian companies raising cheap global money," say bankers.

Partly, the push is coming from global institutional investors and regulators towards ESG. But fund houses or asset management companies in India are also taking initiatives to launch ESG funds in the retail market. Currently, there are over half a dozen ESG-focussed mutual funds that have pooled money from retail as well as high net worth individuals (HNIs) to invest in ESG-compliant listed companies. The size of funds is Rs 8,000 crore-plus against Rs 32 lakh crore for the mutual fund industry. "The ESG drive is only a 2-3 years phenomenon. The AUM will certainly grow going forward," says the CEO of a mutual fund. A portfolio analysis of ESG funds shows investments in banks, technology and renewables. The options to invest are also limited. Many funds invest in banks, whose loan portfolios are not in environmentally-sensitive sectors like coal, power, etc. This means investment in banks like HDFC or Kotak, which as a business model, never took bets in powers and infra sectors.

Currently, Avendus, a financial services firm, claims that they are the only ESG fund in the country that has unveiled the carbon footprint of its portfolio. As a benchmark, the carbon footprint of any ESG fund has to be lower than the Nifty-50. "Our investment process is broken into three parts - stock selection, stewardship, and engagement. The fund has set the materially relevant country-related ESG factors like air pollution, water security, carbon emission, cybersecurity, and minority shareholders' rights," says Abhay Laijawala, Managing Director and Fund Manager, Avendus Capital Public Markets.

In the last two years, the Avendus fund has outperformed benchmarks. "There is evidence of ESG funds performing better than broader indices. We are finding a good amount of interest from investors. Globally, millennials are driving this change by investing in ESG funds," says Chirag of Quantum Asset Management. So, who monitors the compliance part for MF or ensures that the money is invested in ESG-compliant companies? Avendus has an exclusive tie-up with Institutional Investor Advisory Services (IiAS), an independent ranking advisor, who has put in place a framework covering ESG principles. Many, however, question whether retail investors are really conscious of investment in ESG, or it is just packaging by the MF industry to garner more AUM.

The private equity and the venture capital industry, though deals in equity investments are doing their bit. The 'G' of ESG was always an integral part of PE investing. Industry says the evolution of E is slowly taking shape. Environmental areas include air pollution, water, and waste management, deforestation, etc. Post pandemic, the 'S' or social is also becoming a part of the sign-off. "There is significant engagement between investors and companies. People are ready to forgo short-term margin losses because of investments, but re-rating offsets losses of margins in the short run," says Sambitosh Mohapatra, Leader (ESG) at PwC.

PE firms are in a much better position to bring out change (in management thinking) towards ESG as they own a substantial stake or are on the boards of portfolio companies. Investors or limited partners in PE are very conscious of ESG compliance. But there are conflicting signals. PE is always geared to generate maximum returns in a short time. The companies are unlisted with little compliance pressure from regulators. "There are some funds trying to invest in the market. But opportunities are not too many because those are equity funds. These renewable power projects work on high debt-equity. The debt requirement will be at least three times equity," says a banker.

Challenges on the Way

The first big barrier is corporate governance. If there is good corporate governance, the rest follows automatically. "Corporate governance is the starting point for every investor. In fact, any investment by the institution, including non-ESG, require a good corporate governance practice in place. This is fundamental," says Chourasia. The track record shows how good or bad is the company in governance or quality of management and board. "There has been much focus on governance so far and unfortunately, awareness in the 'E' part has been lacking. India is among the top climate-vulnerable Asian nations," believes Laijawala of Avendus. He points out the environment is coming slowly and steadily into the narrative. "But unfortunately, I don't think sustainability reports in India are focussing on the environment as they should be," he says.

That leaves few options for investors. "The bigger problem in the ecosystem is how to deploy the money," admits Chourasia. Currently, there are challenges in getting quality data from companies. Investors have to rely on the company's annual report and disclosures. There is a lack of standardisation in ESG reporting. "They need to ensure contract enforceability in India. This is a big issue investors are facing in the energy space," says Chourasia.

IiAS says the challenge for investors is to determine what needs to be measured, why it is relevant or material, and how it might impact the company performance in future. "Once the data is obtained, it is integrated into the investment process. To do so, you need to navigate through various global ESG principles," it says. There are also instances of greenwashing. There are instances of money going to projects not certified green or a normal project given the counters of green. The investors are demanding third-party certifications. The push and pulls from the investors is working. The government and the regulators are also slowly setting the frameworks.

Clearly, these ESG-friendly changes will definitely change corporate behaviours and also the environment.