How are Investors and Lenders driving ESG?

{This is the second part in my series of posts around “Why am I bullish about ESG?”. In the first part , I explained how customers are pushing for ESG initiatives. In this part, I talk about financial institutions - investors and lenders }

Investors and Lenders:- If there is one set of stakeholders (apart from Government) that has been a major driver of ESG initiatives, it is the Financial Institutions. Amy Domini created the Domini 400 Social Index (and then subsequently a fund around the index), around ESG themes, c. 1990. This was even before the first United Nations Framework Convention on Climate Change (1992).

Way back in 2016, managers handling more than $22 trillion of assets used ESG data to make investment decisions .

In the period 2011-2018, the share of S&P 500 companies that published information on their sustainable development, ESG initiatives and performance increased from less than 20 percent to 86 percent .

I have been part of VC discussions from c.2018 on the lines of “what is the impact you are creating in terms of farmer income / reduction in food loss / carbon emission / etc”. VCs in India have LPs sitting in Europe or US who have their own sustainability-related-goals and they push it down the line. Start-ups are evaluated primarily on the strength of their business idea, but the impact/sustainability becomes a check-point that cannot be skipped.

In the food/Agri space, the first big news I heard of ESG-linked-loan was in 2022, when Olam group raising USD 1.9bn . In Sep 2023, in India, DCM Shriram Sugar business raised 200 Cr of sustainability-linked-debt from HSBC . Many others have raised similar debt now. Even start-ups are getting international debt to support decarbonisation. As an example, Smart Joules has bagged a debt funding of $8 Mn from the Denmark government’s Investment Fund for Developing Countries (IFU) .?

I was speaking to a friend working in an MNC bank in India, and he mentioned that his bank's aspiration is to build the ESG-linked-loan-book in India to a size larger than the entire loan-book as of today.?

Tata Communication has just announced its plan to raise USD 1bn through the “Sustainability Linked Loan” framework .?

By the way, there is not just a “carrot”, there is also a “stick” when it comes to ESG and financial institutions.?

A study by Societe Generale, dated 2020, showed companies should take environmental and social factors seriously . They found that two thirds of the time shares underperformed the broader market by an average of 12% over the subsequent 2 years.

A few years ago, Tesla faced some problems due to ESG. Despite being the world’s best-known EV brand (and thus, supposedly, a sustainable and climate-friendly-business) was kicked out of the ESG index. S&P said Tesla’s “lack of a low-carbon strategy” and “codes of business conduct,” along with racism and poor working conditions reported at Tesla’s factory in Fremont, California, affected the score.

Be it your equity investors, or lending institutions, what you do around ESG, will have a major impact on your future financing activities.

{This was the second part in my series of posts around “Why am I bullish about ESG?”. In the next part , I will talk about the role of government agencies. }