ESG investments have gained significant impetus in India in recent years. By 2026, the projected global assets under management (AuM) of ESG-related investments are expected to reach $33.9T whereas in the Indian context, over 64% of investors are anticipated to increase their exposure to sustainable funds this year. This is despite the massive accusations of greenwashing in the country. 

According to FIS’ 2023 Global Innovation Report, 60% of financial services and fintech firms globally are developing new ESG products and services. While the momentum of ESG investments shows its growing appeal, the pace of change introduces challenges. 

Governments, regulators and investors grapple with various issues relating to data, standards and definitions. Unfortunately, this lack of standardization around regulations, reporting, data collection, and marketing has led to companies using deceptive tactics to sell their investment products and mislead customers. Further, having many data types from disparate sources has also raised questions about the meaning, quality, reliability and timeliness of data that has significantly affected investor confidence. 

The potential of the ESG sector in India is not debatable in any way. However, to fully realize this growth potential, it is crucial to address these challenges effectively.

Regulatory Concerns

One of the most significant drawbacks of the ESG sector in India is the need for more stringent government regulations regarding issuing and advertising these products. 

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Although there are a lot of different ESG rating frameworks that are currently approved by SEBI, none of them are standardised across the spectrum. Thus open to subjectivity and bias. 

This is where a specialised and standardised ESG framework comes into play. A standardised ESG framework, will rate bond issuers on different parameters to ascertain if their sustainability claims are bonafide and restore investor confidence in the green investment sector. Here, the BRSR notification and SEBI framework for disclosures and reporting is a welcome move. 

Along with the ASCI, this framework sets a strict mandate for adherence to ethical and moral practices amongst all ESG advertising, disclosures and reporting and provides investors with tools to gain more control over their investments.

Further, not only will does this framework help in risk assessment and establish clear communication channels between issuers and investors but also, gives investors an opportunity to exit ‘green’ investments wherein proceeds are not driven towards sustainable projects anymore.  

The framework for Sovereign Green Bonds approved in November 2022 is also another landmark move focussed towards encouraging green investments in the country. 

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Do these help mitigate greenwashing issues completely? Only time will tell. But these regulations in place definitely act as a screening tool and risk mitigator to get more accountability on the plate for bond issuers. 

Technological Intervention

Another pressing issue in the ESG investing sector is its vast data and integrity. Nonetheless, technology is playing a massive role in addressing these challenges. For example, artificial intelligence (AI) and machine learning transform how information is processed and utilized across the financial services industry and business, making it much easier to comprehend and apply. 

AI and machine learning are making it possible to connect and process disparate data sets that the ESG space mainly comprises, streamline the information digitization process, standardize and provide unique significant data types of insights. Therefore, we expect both technologies to be integral to ESG solutions or services.

Transformational technology: DLT

DLT – like blockchain technology, can potentially revolutionize the ESG sector by offering greater transparency, integrity, and efficiency. A prime example of this is in the structuring, issuance, and distribution of green bonds, which involves a complex and multi-stage process. The adoption of distributed ledger technology (DLT) can simplify this process by reducing the number of parties involved and permanently lowering operational costs. Additionally, smart contracts facilitate instant distribution, while the incorruptibility of DLT reduces the possibility of fraudulent activities, and settlement can be promptly executed through real-time or near-real-time payment systems.

The bottom line

Many financial services and fintech firms in India are already addressing the data gaps and investing in technology to enhance their ESG reporting and disclosure capabilities. However, some firms are taking a piecemeal approach to ESG compliance and waiting to see how upcoming regulations will play out.

As the regulatory environment in India continues to evolve, companies must embrace the right technologies to gain a competitive advantage. In addition, investors are increasingly savvy and want quantifiable data and information, so companies need to be transparent and data-driven about quantifiable ESG goals, benchmarks, and to continue achieving better results and maintain stakeholder confidence.

(By Richard Peterson, ESG Enterprise Solution Strategy – Capital Markets, FIS. Views expressed above are personal opinions of the author)