The ESG market will continue to grow and will resemble the IT boom in its pace of expansion
The term ‘Boom’ is defined as a period of elevated or increased growth within a business, market, industry, or economy. ESG term loans now exceed $41 trillion globally, and the market is nowhere near complete exploration, let alone saturation. Welcome to the new decade(s) of the ESG boom.
India is a tiny (comparatively) market for ESG, but that just means the Indian ESG market is aggressively expanding. And all the signs are pointing towards just that. A small indicator is India’s climate-tech firms which attracted a modest $3.7 billion in funding in 2022. But this number is a six-fold increase from 2021! This is all the more pertinent when you realise that that year, start-up funding in India was down 40%. The ESG market is here to stay and will expand in a manner reminiscent of the IT boom. So all that remains is for us to understand the major trends within this lucrative market from an Indian perspective.
Infrastructure
And the first place we should look is where the most development is…the Indian infrastructure. The inauguration of the ambitious $1.2 trillion ‘Gatishakti’ project aims to bring about a revolution in India’s connectivity by road, rail, air, and ship. Infrastructure projects act as catalysts for the logistics and transportation industries, not to mention the growth that the real estate sector will see because of this. Moreover, industries that complement this project, such as IT communications, water, sewage, and energy transmission, will also receive a heavy boost. All these industries have a very significant environmental and societal impact that must be mitigated. And thus, all these industries will augment the ESG market directly.
5G
The 5G market in India is set to be worth USD 232 billion by 2025. In fact, as a technology, not only will it first create its own space, but it will eventually start to cannibalise on the 4G space as well. And better connectivity means more downloads, more online meetings, and much, much more data. The IT industry already has a larger energy requirement than the aviation industry. By 2030, it's predicted to rival the national energy requirements of Sweden. Already, close to a third of wireless operators in India have committed to energy efficiency initiatives. The technology itself is going to revolutionize an industry that has yet to be very carbon-intensive. Given 5G’s low power but very high performance, this quality can be used to plan cities better, where green spaces can now be effectively marked as soon as 5G becomes more of a norm than a novelty. And that is supposed to happen within the year.
Small and mid-sized businesses
So far, ESG has been the domain of large enterprises. ESG implementation and its rewards seemed too ponderous and labour (& cost) intensive for mid or small-sized businesses to invest in them. Too many parameters (close to 800) and too huge of a checklist. But SEBI has changed that virtually overnight. The introduction of a BRSR core, which comprises just 50 parameters, has streamlined the entire ESG disclosure process while adding reliability and accuracy. This will have a stimulating effect on ensuring the penetration of the ESG market to all industries. Moreover, the need for larger corporates to ensure sustainability across their entire value-chain means ESG compliance requirements will eventually cascade down to every supplier, irrespective of their size or location.
ESG investments
It follows logic. Make ESG disclosures more accurate and reliable; reduce the parameters to avoid complexity. Then use these very reliable readings to predict the market. The next thing is investments in the form of mutual funds, bonds, debt securities, and others. Welcome to the new and expanding world of Impact finance. In India alone, the meteoric rise of ESG investment has necessitated the creation of an ‘ESG’ mutual fund category. Numerous green bonds (and yellow and blue bonds!) are now floating about in the market. The government of India has undertaken to issue sovereign green bonds to assist in green infrastructure.
India and global trade
As India awakens to her true economic potential, it stands to reason that this potential cannot be realised without international finance. And international finance responds best to ESG disclosures. Not only will this increase cooperation between nations to formulate a greener framework for commerce, but it will also facilitate the death of "greenwashing" and the creation of a more transparent monitoring system. A case in point is the EU, India’s third-largest trading partner. Anything that is imported into the EU must comply with the 22 standards of the European Commission, with no exceptions.
ESG trending is not a nuanced space, at least it won't be for the next 5 years or so. Given how the intrinsic value of ESG disclosures is being understood globally, coupled with the willingness of governments worldwide to mandate the disclosure through the law, there is no ceiling for ESG in the foreseeable future. A good place to start is in the five areas mentioned above, but by no means is this an exhaustive list of the trends within the vast ESG ecosystem, as we are discovering daily.
(The author is Partner, Global Head of ESG Consulting, at Uniqus Consultech.)