– By Ravneet Mann
The transition to renewable energy and the emphasis on ESG principles present a significant opportunity for Indian Mid-cap companies, investors, and startups. Mid-Cap ETIs, in particular, offer a strategic vehicle to leverage this shift, promising not only sustainable growth but also alignment with global investment trends and consumer preferences. The green revolution is here, and it’s time for India’s Mid-Cap sector to lead the charge.
ETI is a framework to evaluate countries and companies based on their Environmental, Social, and Governance (ESG) practices. It provides insights on progress in environmental sustainability, social inclusivity, and governance effectiveness. India ranks 67th place globally on its Energy Transition Index (ETI) by the World Economic Forum.
The global landscape has witnessed a significant surge in low-carbon energy transition investments, amounting to $1.1 trillion, reflecting a notable 30% year-on-year increase. Investments in renewable energy surged by 17%, while electrified transport witnessed an uptick of over 54% (Bloomberg New Energy Finance, 2022). This trend holds the potential to allure Indian Mid-Cap Companies towards transitioning to renewable energy sources, unlocking access to burgeoning markets and evolving demands.
The India opportunity
As of July 2023, India’s combined installed capacity for renewable energy sources stood at an impressive 179.322 GW, signifying a robust commitment to achieving a 500 GW capacity by 2030. This commitment is part of a broader national goal to reduce carbon intensity by 45% by the end of the decade and to achieve net-zero carbon emissions by 2070. India presents a lucrative opportunity for a mid-cap Energy Transition Index, bolstered by its commitment to sustainable energy. The allocation of Rs. 19,700 crore to the National Green Hydrogen Mission in the Union Budget highlights the focus on reducing carbon emissions.
The development of 4,000 MWh capacity in Battery Energy Storage Systems underlines the potential for energy stabilisation technologies. With the government’s support for 100% Foreign Direct Investment and the introduction of green bonds, the investment climate is favourable. This, combined with the push for renewable energy sources, positions mid-cap companies in the energy transition space for significant growth and investment opportunities in India.
While broader ETIs offer diversification across market capitalisations, a Mid-Cap ETI allows investors to specifically diversify within the mid-size segment, which can have different risk and return characteristics compared to large or small caps. Mid-Cap ETIs can specifically target companies that are integral to India’s growth sectors and innovation capacity, particularly for renewable energy, technology, or healthcare. These sectors are at the forefront of India’s economic transformation and energy transition offering unique investment opportunities.
A specialised mid-cap energy transition index in India could significantly attract green capital because it would provide a focused platform showcasing companies actively transitioning towards energy efficiency and sustainable practices. Stakeholders believe that this index would improve the discoverability of energy-efficient companies and highlight those businesses making substantial efforts to reduce their carbon footprint, thereby incentivising other companies to follow suit.
However, there are valid concerns regarding data credibility and the risk of greenwashing. The effectiveness of the index depends on accurate and transparent reporting of companies’ green initiatives. Without stringent measures to verify these claims, the index might inadvertently promote greenwashing, giving a false impression of environmental responsibility. To mitigate the risks associated with data credibility, India could establish strict reporting standards and criteria for companies to be listed in the index. This includes transparent disclosure of environmental impacts, third-party audits, and adherence to international sustainability guidelines. Continuous monitoring and evaluation of listed companies ensure ongoing compliance and genuine green practices. Implementation of strict data verification and validation processes ensures that the information companies provide in the index is accurate and transparent.
Educating potential investors about the nuances of green investments and the criteria used in the index would help them make informed decisions in promoting genuinely sustainable practices. Therefore, aligning it with the Global Reporting Initiative (GRI) or the Task Force on Climate-related Financial Disclosures (TCFD) would greatly help keep track of the participating companies. The issuance of green bonds by mid-sized companies as a way to raise funds for sustainable projects will give investors a clear use-of-proceeds framework and aid in aligning their future goals.
In light of the advantages of adopting such an index, engaging stakeholders in a dialogue to deliberate the unique advantages and challenges specific to India is indispensable. Such a collaborative approach to building this index will mark a critical juncture in reconciling the potential rewards with the inherent challenges and risks, particularly in a dynamic and diverse economy like India.
(Ravneet Mann is the Chief Strategy & Policy at Stride Ventures.)
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