Inevitably, 2020 turned out to be a watershed year for the adoption of Environmental, Social and Governance (ESG) in real assets, i.e. real estate and infrastructure, as both climate and pandemic-led disruption prompted investors to actively weave in ESG considerations into their investment decisions. Continued occurrence of extreme weather conditions whether in the form of heavy rainfall and flooding, unprecedented heat waves both in India and globally have further amplified the importance of factoring in environmental considerations in all forms of decision making.
According to Bloomberg Intelligence, ESG assets are on track to exceed $53 trillion by 2025 and represent more than a third of the $140.5 trillion in projected total assets under management (AUM). Inevitably, this shift in stance is engendering significant new trends and is leading to changes in both development as well as in the financing of real assets in India.
ESG Integration in Infrastructure Investments: ESG integration is crucial for infrastructure projects. Evaluation of potential environmental impact of projects on factors like biodiversity, resource use and possibly energy transition is critical prior to investment. The presence of infrastructure within communities makes handling of social issues another key differentiator in the development of and asset management of such projects. Aspects like Health, Safety & Environment (HSE), community engagement, the implementation of diversity, equity and inclusion initiatives play an important role in infrastructure asset management from a risk mitigation perspective as well as the ability of these projects to deliver superior risk adjusted returns.
Changing Attitude of Developers Toward ESG: Gone are the days when ESG was a good to have. With an increasing number of investors now keen on ESG-driven portfolios, many future-ready developers in India are increasingly turning towards ESG compliance. Developers are also striving to transition to a zero-carbon economy, in an effort to align themselves with global climate action best practices. According to a study, the job demand in the ESG sector has grown to over 468% in India from April 2019 to April 2022 indicating the increasing focus from companies on this topic.
Pick Up In Green Financing: Considering investors’ rising appetite for ESG financing, and the growing concerns around climate change, there has been a slow yet steady rise in the issuance of green bonds. Indian corporates have been issuing green bonds since 2015, with total issuances of over nearly $25 billion till date. India has also completed its maiden $2 billion sovereign green bonds issuance in the first quarter of 2023, which will be utilised to finance green projects in the country. Sustainability and green development are priority areas mentioned in the budget and this is expected to enable a steady pick-up in green financing, despite headwinds like global uncertainty and capital moving out of the economy.
There are also interesting trends around growth of innovative private financing through sustainability linked bonds. Similarly, some mortgage providers have launched residential mortgage products with lower pricing on purchase of sustainable residential property such as IGBC Gold rated projects.Growth in Green Buildings: Countries across the globe have pledged to achieve carbon-neutrality in the next few decades. The real estate industry is playing an imperative role here, with the rise in green buildings. Through technology adoption, low carbon-emission buildings are being developed, with a focus on limited usage of energy, resource efficiency, and waste management. Further, the carbon footprint of the industry is also being lowered through enhanced efficiency and smart construction. Safety of the workforce, and the environment, is also taking center-stage in the global infrastructure arena. With 146 certified buildings and spaces, or almost 2.8 million gross square metres, India was placed third in the world for
Leadership in Energy and Environmental Design (LEED) of green buildings in 2021, according to the US Green Building Council’s annual report. Regulatory Impetus: While it is true that many developers are themselves turning towards ESG, regulatory impetus has played an imperative role in this aspect. The Budget, as well as India’s focus on net-zero carbon emissions by 2070, is ensuring policy support for both sustainable investing and infrastructure development aligned with ESG norms, while also pushing laggards to keep pace with the developments. Reporting under the new requirements of Business Responsibility and Sustainability Reporting has been made mandatory for the top 1,000 listed companies by market capitalisation from FY 2022-23 onwards.
Further, the RBI is expected to issue guidelines for regulated entities, in an attempt to support green finance and mitigate climate-related financial risks, in the near future. As the country, and the globe, works towards a sustainable future, there is no doubt that ESG in infrastructure and real estate is poised to become the norm, rather than the exception.
The writer is Head – Infrastructure Strategy, Edelweiss Alternatives.
