Opportunities for sustainable investment in India

Following the recent launch of the City of London report Supercharging Green Finance in India and the first Sustainable Investing UK India Partnership Forum, what do the opportunities for sustainable investment in India look like and how can the UK-India partnership support each other with their ambitious social and economic goals?

The UK was the first major economy to put into legislation its ambition to be carbon neutral by 2050. India has committed to producing 40% of its installed capacity to be non-fossil fuel sourced by 2030 and to reduce its CO₂ emissions by 35% relative to 2005 levels by the same date.

So what`s all the hype? According to its own estimates, India needs to invest $450bn a year over the next 10 years to meet its urban sustainability and renewable energy target. This includes $30bn a year on energy and that’s excluding investments in grid infrastructure which will significantly increase this amount.

The current model for such investments is heavily reliant on the banks and NBFC`s (non-banking financial company) however these sources are under strain already and unable to meet the need with NPA`s (non-performing assets) at 10.8% – the 6^th largest of any banking system in the world!  That, combined with the fact that infrastructure accounts for 36% of bad loans means there is a significant problem. So much so that the lack of capital has meant that large scale costs of borrowing have increased by 1% for green projects.

How then does green equity from both domestic and overseas investors help fill this gap? The rapid growth of ESG (Environment, Social and corporate Governance) investing is driven by consumers increasing awareness and conscious choice for their investments. ESG funds account for $31tn or 32% of the global investment pots but only 0.1% – $25bn – is invested in India, despite its position as the 6th largest economy on the planet.

Why is this?

Many investors will cite the need to remove regulatory barriers, especially on long term funds in the pension and insurance sectors. UKIBC`s Doing Business in India Report once again highlighted legal and regulatory impediments as the largest barrier to doing business in India, as 59% of our respondents cited.

As we move to a more conscious investor with a more balanced scorecard approach to investing, does climate change need to be seen as a financial risk and should it be factored into traditional decision making? UKIBC members Shell tie their executive pay to carbon reduction and RBS is starting to link its investment strategies to the UN`s SDGs.

Shell and RBS are just two examples. UKIBC have recently launched our Socio-Economic Impact platform showcasing the positive social impact that UK companies are having in India in addition to the economic benefits. The launch includes the creation of a mini-site providing a comprehensive source of information, news, case-studies and events on UK businesses and higher education institution’s social impact in India.

Many associate the greening of finance with lower returns but as Howard Sherman, Executive Director of MSCI ESG Research, pointed out during the conference, ESG funds outperform regular funds two-fold. This is evident in the 15% growth in ESG funds in the first half of 2019 and the green bond market recently passing the $1tn threshold.

India has the second largest green bond market among the emerging economies, having issued $7.2bn in green bonds to date with previous issuances being oversubscribed by 2-3 times!

International equity investment in India`s clean energy sector has doubled year on year from 2016-2018 but still has only just hit the £1bn mark which is tiny when you consider that India has $564bn of assets under management.

So how can India bridge the gap and attract more international capital into these vital investments and projects?

There is a need to increase transparency; the lack of historical and credible data makes investing riskier. There is also a need to showcase successful case studies such as the Haryana Renewable power project and highlighting green investable opportunities and their finance gaps.

Currency risk is still an issue in India for investors with average coupon for domestic Indian green bonds at 7.5% compared to 4.7% for international Indian green bonds issued, suggesting that India should look to capitalise on the UK`s expertise in raising capital.

If you would like to find out more about the UK India Business Council’s work supporting financial, legal, and professional services between the UK and India, please get in touch.