Abstract

The aim of the paper is to study and focus on the investing on the non-financial
factors such as environmental, social, governance factors of the organization. This
research paper helps to understand the concepts, scope, importance, shortcomings
and future of ESG investing in India. To find out the perception of the stakeholders
are likely to adopt these practices or focussed on the profits and returns of their
investments. Therefore this research paper highlights the advantages of ESG
investment for businesses as well as risk considerations that should be taken into
consideration by organizations and investors before making any decisions. The
study also clarified how ESG investments impact an organization's long-term
performance.

Introduction

Environmental, Social and (Corporate) Governance better known as ESG, is an

intangible key evaluating factor for socially responsible and aware investors. In
recent times, Investors are stepping up by focusing on these nonfinancial factors of
social and environmental concerns as a part of their analysis to identify selective
investments with growth opportunities and pin down material risks associated with
the decisions. Sustainable Financing, Impact Investing, mission-related investing,
Sustainable investing, these terms are interchangeably used with ESG Investing.
With ever changing times and desperate climatic conditions, a need for such
proposals and investing criteria emerged and paved its growth, which has been
majorly driven by responsible investors’ aspiration to have an impact on the
society and environment along with the economic benefits of investing. This
growth is a net result of a bigger trend cycle which is being observed around the
globe to factor in the efforts to contribute to a global cause and in turn improve
environmental status. Even though ESG Metrics is not a standard practice during
financial reporting, there is a substantial increment in the number of companies
who choose to disclose ESG metrics either in their annual financial report or in the
company’s sustainability report.
This Emerging concept is accepted and vastly popularized among young investors
due to awareness and sensitization over ESG concerns. According to a survey
conducted by Morgan Stanley, 95% of Millennials are interested in ESG Investing.
This growth trend is also observed in the case of regular investors and financial
institutions, who are factoring in ESG assessments as a key investment decision.
The UN Principles of Responsible Investment (UN PRI) has observed an
exponential rise in the signatories to over 2300 signatures catered to institutional
investors and the survey by Morgan Stanley also states that 85% of individual
investors are interested and consider Sustainable Financing while making an
investment decision.

In the current era, Investors are including ESG criteria before making any
investment decisions. This criterion will help investors to screen investments.

Environment Criteria aims to characterize a company's performance from the

standpoint of its influence on the environment, which has taken centre stage in
recent years.

Social criteria specify how an organization handles its relationships with its
workforce, customers, and suppliers as well as how it handles diversity and
engages with the groups where it operates.

Governance criteria includes leadership, remuneration, internal controls,

shareholder rights, and corporate culture.

ESG Rating in investment decisions:

ESG Risk rating is an objective, independent and unbiased opinion on a company’s

ability to mitigate future/emerging risks associated with Environment, Social, and
Governance issues that can have a material impact on a company’s financials. ESG
rating identifies a company’s exposure to relevant industry-specific ESG risks and
benchmarks the company’s management of the risks to that of peers in the
industry. An ESG rating can be considered a performance indicator illustrating
companies’ long-term sustainability, growth potential, and future performance in
an ever-changing market. The ESG rating allows the investors/lenders to make
more informed decisions.
Investors worldwide are investing in businesses that are more responsible. They
are also looking for models that are able to predict/indicate areas in a company’s
management that might negatively impact the company’s performance, due to how
the company recognises and manages issues like climate risk, social inequality, and
ethics in business. ESG assessments are widely accepted as a tool that helps users
to evaluate the company’s and industry’s performance on ESG issues.
ESGRisk.ai’s assessment model and report are designed to help users to quickly
understand companies’ ESG risk susceptibility & risk management framework,
enabling them to to directly integrate ESG factors into their portfolio construction
and management.

ESGRisk.ai has been regularly interacting with market participants across the
country about the difficulties they encounter while evaluating or tracking
companies. ESG assessments came out as a major challenge. The ESG rating
reports provide comprehensive and timely information, incisive analysis, and
unbiased opinion that can be used by companies, investors and lenders alike to
identify how a company is managing its ESG risks.

COMPONENTS/CRITERIONS OF ESG:

3 key components of ESG are – Environmental, Social and (corporate) Governance

aspects. Since ESG factors are often interrelated, there may be scenarios where
identifying and classifying an ESG activity as only an Environmental, social or
governance practice might not be feasible. There are no set examples of ESG
issues and the list continues since new emerging issues arise constantly.

1. Environment: This component essentially targets conservation and preservation

of the natural world and its scarce resources. This criterion vitalises whether a
company adopts a low carbon footprint and follows eco friendly methods in its
functioning. This advocates wise and efficient use of resources. Some factors
include-

Greenhouse gas emissions

Biodiversity Loss

Deforestation

Waste management

Carbon footprint, global warming

Climate risk

Energy efficiency

Natural resource conservation

2. Social: This aspect focuses on broad features of social aspects, majorly pivoting
around consideration of people and relationships. At the core of any business
organization are its people. Socially developed organizations respect and hub
human fostering and growth of its employees and community. This criterion looks
at a company's business relationships with its customers, community and business
partners. It even observes how a business organization upholds social good in the
wider world, which is not limited to mere scope of business activities. Other
factors include-

Gender and Diversity policies

Health & Safety

Stakeholder relation

Labor standards & working conditions

Community programs

Customer Satisfaction

Workplace benefits

Data protection and privacy

Engaging in volunteering work to improve the socio-economic conditions

3. Governance: This criterion elucidates standards for running a company, it
considers how the board and management drive positive changes. This also
features the transparency and ethical well-being of the company and holds the
highest standards of governance consistently. It also takes into account the
executive management’s behavior to cater to the needs of various stakeholders-
employees, shareholders and customers. This is the base, the foundation through
which a company is gauged. Apart from this, other factors include-

Shareholders rights

Audit committee structure

Stakeholder engagement

Ethical standards

Board diversity & governance

Executive compensation

Accounting practices, transparency

Bribery and corruption

CHALLENGES TO ESG INVESTING

There are specific challenges that ESG investment faces in India:

Lack of quality data: AccurateData about a company’s environmental, social or

governance performance is usually procured from an analyst, a fund manager or an
investor. There are also other sources of acquiring this data such as an
organization’s sustainability report and annual report, media information available
through public sources such as news articles. This process often tends to be
tedious, complicated and inaccurate. Hence, issues such as accuracy, reliability and
data credibility continue to be an obstacle in expanding ESG investments in India.
Lack of market standards: There is a lack of market standardization when it comes
to naming ESG investing. It’s called by various names- impact investing, socially
responsible investing, sustainable and responsible investing. There is also a lack of
standardization in ESG data collection, impact measurement standards and
reporting methodology. This adds to another level of complexity for investors.

Conventional mindset: A lot of investors and asset managers consider ESG to be

an added expense, which could be done away with. This lack of vision restrains the
growth of ESG investing in India.

Lack of track record of ESG funds: Most of the ESG funds have come up recently,
in the last 2-3 years. Hence, India does not have a long track record of ESG-
aligned funds which does not attract as much investment.

Lack of advocacy: While ESG investing is gradually becoming popular with the
companies, there’s still not enough advocacy about this issue, especially in India. It
is essential to make investors more aware of the benefits of ESG investing.

ESG IN INDIA AND SCOPE

The success and growth of ESG investing worldwide paved its way towards Indian
Markets, after being big globally. Assets under Management (AUM) nearly
doubled itself in the last four years amounting to $40.5 trillion in 2020. Since the
introduction of Nifty 100 ESG Index in 2011, it has outperformed its parent index
with a return of 10.6% as compared to 9.1% of the traditional Nifty 100 Index.
This proves a steady growing interest in ESG investing by Indian investors.

The demand and growth for ESG funds in India is experiencing an upward curve
and with pandemic hit it all went uphill. The covid crisis turned out to be an
inflection point in the minds of Indian investors and the flow of money has
remarkably risen into ESG funds says Kaustubh Belapurkar, Director of Fund
Research at Morningstar India. Earlier Indian investors did not have many ESG
funds options but after October 2020, more than half a dozen asset management
companies have introduced ESG-centric fund plans. Major funds include Axis
ESG Equity Fund, Quantum India ESG Equity, SBI Magnum Equity Fund (oldest
ESG fund in India). Apart from these, ICICI Prudential AMC, Kotak and Aditya
Birla have also introduced such funds. Currently, India has two major ESG indices,
S&P BSE 100 ESG Index and Nifty 100 ESG Index.

As per Morningstar, in the quarter ended December 2020 Indian Markets were
flooded with a net inflow of ₹3,749 crores into ESG based funds and in March
2021 it saw a net inflow of ₹ 678 crores. Since inflow of capital into ESG funds in
India is experiencing a boom, it is very likely that other companies will follow
through and exhibit better Environmental, Social and Governance practices.

The reason for the success of ESG funds in India can be explained largely due to
more investors becoming socially aware and conscious regarding the ESG
components. Moreover, factors such as statutory regulatory requirements have
played a vital role to impel companies to be more ESG compliant. There have been
many cases where companies and business firms were closed down or penalized
for not abiding to these regulations, making it clear that severe consequences will
follow. Apart from this, many foreign institutional and independent investors are
extensively investing in ESG compliant companies and sustainable business
models. These lucrative offers have attracted many firms to follow regulations and
prospects of Foreign Direct Investment (FDI) have made ESG investing even
stronger in India.

As per Nifty reports, it can be concluded that ESG indices are more productive in
the post-Covid period than the pre-Covid period. Thus, giving an impression that
investors are inclining towards ESG indices post aftermath of Covid.
Consequently, the ESG portfolio can be accredited as Covid free portfolio. The
rising concern for environment friendly methods and Covid pandemic have proved
to be the main cause for this boost of ESG funds in India.

ESG INVESTING IN INDIA

Several factors led to the growth of ESG investments in India:

A move towards a greener economy: Under the Paris agreement, in 2015, India
filed its Nationally Determined Contributions, for the period 2021-2030. This
states an investment of an estimated USD 2.5 trillion between 2015 and 2030.
India is also committed to achieving the Sustainable Development Goals (SDGs) to
carry forward its mission of development without destruction.

Turning it into a global plan: Factors like business ethics awareness, corporate
governance, and business risks, are prompting businesses to be more proactive.
More companies now know the benefits of ESG investing. Incidentally, global
ESG funds are also investing in India. According to the Global Sustainable
Investment Alliance (GSIA), 41 Global E&S seeking funds have invested on an
average 25 percent of their funds in India equities. In the future, there could be
more ESG investing in India.

Gradual interest from domestic investors: Increasingly, domestic investors such as

SBI, Quantum, Kotak Mahindra are taking a significant part in ESG investing.
They are warming up to sustainable investments. Asset management companies are
signing up to UN-supported principles for responsible investment. Over the last
few years, the Indian investment market has seen the entry of quite a few ESG
funds. Avendus launched India’s first ESG-based fund in 2019. Around the same
time, Quantum Asset Management company launched its first open-ended ESG
fund- Quantum India ESG Equity Fund. Quantum launched this to achieve long-
term capital appreciation by investing in a share of companies that meet
Quantum’s ESG criteria.

Increasing reform measures: India has been witnessing a slew of reform measures
to drive investments in emerging sectors such as renewable energy, several
voluntary and mandatory guidelines to drive ethical corporate behavior, and
reporting on material ESG factors.
Sustainability indices in India: In recent years, quite a few indices have come up to
track, motor and measure the ESG performance of various companies. Some of
those are as follows- S&P BSE Greenex, S&P BSE Carbonex, S&P BSE 100 ESG
Index, NIFTY 100 ESG Index, NIFTY 100 Enhanced ESG Index.

These developments and measures have led to the growth of ESG investing in
India and the world. In the US, net flows into sustainable funds reached $20.6
billion in 2019, more than four times than that in 2018. In India, the size of the
Socially Responsible Investment (SRI) asset base stands at USD 28 billion, which
is 0.1 percent of the global SRI assets. Domestic asset managers mainly drive this
growth.

Stakeholder:

A stakeholder is either an individual, group or organization that’s impacted by the

outcome of a project or a business venture. Stakeholders have an interest in the
success of the project and can be within or outside the organization that’s
sponsoring the project. Stakeholders are important because they can have a
positive or negative influence on the project with their decisions. There are also
critical or key stakeholders, whose support is needed for the project to exist.

Types of stakeholders:

Stakeholders can come from a variety of connections to the organization or project.

The most common types of stakeholders include the following:

Customers usually expect organizations to deliver products of value.

Employees are often project stakeholders, who want to contribute to a project that
is related to their job.

Owners supply an organization's equity and capital and are responsible for
organizational goals.
Investors are shareholders, who invest in organizations in exchange for financial
returns and often receive regular financial reporting on the companies they invest
in as well as voting power in major decisions.

Creditors, such as banks and bondholders, lend money to an organization to be

paid back with interest.

Suppliers are vendors that supply materials and products to organizations and have
an interest in their business and the projects they pursue.

Communities have an interest in businesses being healthy, safe and beneficial to

local economies. Businesses create jobs and business for local communities.
Environment, sustainability and governance (ESG) are increasingly important
values for consumers and investors.

Governments collect taxes from companies and their employees.

Objectives of the study:

To understand the awareness level and knowledge of the stakeholders about the
non-financial ESG factors in investment.

To study the impact of the ESG factors in the long-term performance of the
organization.

To determine the interest and opinions of the stakeholders towards the sustainable
development goals of the organization.

To study ESG investing depends upon the ESG score/rating factors by the
stakeholders.

To determine that ESG investing in the organization will outperform /

underperform the return on investment.

Statement of the problem:

The present study basically focused on the stakeholder perception about the ESG
investing in the organization. These various attempts have been made by the
researchers and academicians; there are no proper standards, regulations,
methodologies to be followed. It doesn't create a proper understanding about the
ESG scores, ratings and performance done by the organization.

Need of the study:

ESG investing will provide a view of an organization and its long-term value
potential and relevance to its stakeholders. An ESG rating measures environmental
and social impacts and the effectiveness of the corporate governance in managing
with competitors. In this project it will help us to know about the investment and
importance of the ESG factors among the stakeholders.

In this project, the questionnaire has been circulated to different stakeholders like
employees, customers, suppliers, and others to study about the ESG investing by
the stakeholder towards the sustainable development goals of the organization.

Scope of the study:

The study entitled “ A study on understanding the awareness level of the non-
financial ESG factors by the stakeholders”. This study helps the organization to
understand the most important non-financial factors such as environmental. social,
governance in stakeholder perspective. It also improves the long-term value of the
organization by improving profits, ESG scores and reports to be disclosed to the
investors. Therefore sustainable investment in future will change the investing
pattern in the market towards the sustainability of the organization.

Company profile:

Research Methodology:

This chapter outlines in-depth explanations of the data collection techniques,

research design, and methods that are used to accomplish the research goal. The
choice of methodologies influences the accuracy and originality of the work,
therefore picking the right research instruments is important. The chapter describes
the research methods used to determine how sustainable investments affect the
long-term success of Indian organizations.
Data collection:

Data collection is the process of gathering and measuring information on targeted variables in an
established system, which then enables one to answer relevant questions and evaluate outcomes .

METHODS OF DATA COLLECTION:

Primary data:

The primary data was collected by means of a survey. Questionnaires were prepared and
stakeholders were approached to fill up the questionnaires. The questionnaires contain 27
questions which contain the sustainable investment in the organization by the stakeholders. The
response of the stakeholder is recorded on a different type of scale for each question. The filled
up information was later analyzed to obtain the required interpretation.

Secondary data:

In order to have a proper understanding of the ESG investing a depth study was done from the
various sources such as books, a lot of data is also collected from the websites and the articles
from various search engines like Google, yahoo search and ESG report of the organization.

Sample size:
To study ESG investing by stakeholders towards the sustainable development goals of the
organization has adopted convenience sampling technique. In the initial stage, stakeholders from
different organizations have been selected to be the researcher. The sample size is 110
respondents and the samples selected based on convenience sampling method.

Sampling techniques

Convenience sampling:

In this type of sampling, researchers prefer participants as per their own convenience. The
researchers select the closest live persons as their respondents, subjects who are readily
accessible or available to the researcher or selected.

Questionnaire method:

It is a set of questions which has been prepared to ask several questions and collect answers from
the respondents relating to the research topic. It is usually in online form and should be answered
by the individuals. The forms often have multiple choice, interval, rank based questions. Sets of
such forms are distributed to the different types of stakeholders and the answers are collected
relating to research topics. A questionnaire is a series of questions asked to individuals to obtain
statistically useful information about a given topic.

STATISTICAL TOOLS USED FOR THE STUDY

Tools used for analysis:

The type of data to be analyzed determines the data analysis technique to be used,
and as the study's data are numerical, the statistical analysis method was chosen for
this research. Survey data are presented using frequency tables and pie charts, and
they are examined using correlation analysis. Because it aids in establishing the
relationship between research variables, statistical analysis is appropriate for data
analysis in studies utilizing surveys. Both descriptive and exploratory statistical
data analysis are part of the study of the survey data. The descriptive analysis
provides the mean, median, and mode for each of the survey's Likert scale
evaluations as well as broad demographic information about the population.
Correlation analysis was used in exploratory statistics to show the links between
ratings and the relationships between each rating and other factors. The degree of
importance for each relationship was assessed to identify which ones were most
crucial to the study.

To have a meaningful analysis and interpretation of various data collected, the

following tools were used for this study.

Simple percentage method

SPSS

Simple percentage analysis:

The percentage analysis is mainly used to standardize the response of the respondents. This
analysis is carried out for all the questions given in the questionnaire, mainly to assess how the
respondents are distributed in each category.

LIMITATIONS OF THE STUDY:

The study was not able to collect the response from the suppliers and investment manager that
much expected for our analysis. Due to time constraints, only the survey approach was used; the
interview method was not considered. There were other potential data analysis methods, but only
the quantitative approach was chosen due to time restrictions. Moreover in today’s scenario the
stakeholders are highly focussing on the return of investments, it might be changed in the future.
Data analysis and interpretation