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India: An ESG landscape in transformation

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This is a sponsored article from Federated Hermes.

India’s rapid economic growth over the last two decades has lifted millions out of poverty and contributed phenomenally to global human development. It is now the fifth largest economy in the world and will likely be the third largest in the next seven years, with its GDP more than doubling from the current US$3.3 trillion.

According to our analysis, India is forecast to add more than US$400 billion to its GDP annually, a scale that only the US and China surpass.1 India is poised to drive about a fifth of global growth in the coming decade.2

While growth has moderated slightly in recent months, the outlook remains strong, driven by many factors, including India’s ‘demographic dividend’ (more than half of India’s population is under 30), an expanding middle class and rapid digitalisation.

Meanwhile, from an ESG perspective, the Indian government’s policy commitments around renewables, healthcare, financial inclusion and other sectors, give cause for optimism and present ample opportunities for companies to align with the UN Sustainable Development Goals.

However, India’s economic success has not yet resulted in an improved quality of life for everyone, and gender inequality and labour rights are ongoing areas of concern. Further economic expansion is needed to provide better education and improved healthcare, as well as access to banking services and the Internet, to many more millions of people.

Companies face high exposure to climate change risks, both physical and transition, despite very low per capita energy consumption, and governance standards are sometimes lagging behind Securities and Exchange Board of India guidelines.

Against this backdrop, while the government of Prime Minister Narendra Modi is continuing to push ahead with reforms, it has set a delayed timeframe to achieve net zero of 2070.

ESG: Risks and opportunity

  • Gender diversity in the workplace – According to the World Bank and the UN’s International Labour Organization, overall female participation in the workplace is one of lowest in the world (less than 30% in 2021) and declining. India was ranked 140 out of 156 countries by the World Economic Forum (Gender Gap Report 2021) and is now one of the worst performers in South Asia, despite some improvements at senior and executive levels.3

Figure 1: India’s female participation rate lags behind

Source: ILO/Financial Times

  • Labour rights and human capital management – While labour disputes are still an issue to watch (and much flagged by rating agencies), enlightened companies have a vested interest in ensuring good working conditions and positive employee relations. There is a trend in India towards increasing flexibility in favour of the employer; amended labour laws seek to reduce the administrative burdens on employers and bring more workers into the formal sector. A recent example is Karnataka’s new labour laws that allow 12-hour day and night shifts and an increase in allowable overtime. Companies typically employ a mix of contract labour and permanent employees depending on the skill level required, with lower-skill jobs often given to contract workers.
  • Climate change – Despite very low per capita energy consumption, India is the world’s third-largest greenhouse gas emitter. India’s economy is closely tied to natural resources such as agriculture, water and forests and is therefore highly vulnerable to increases in temperature. Research shows that with a 2°C to 3.5°C rise in temperature, India’s farmers may lose 9% to 25% of their net revenues, which may decrease the country’s GDP by 1.8% to 3.4%. The Notre Dame GAIN Index ranks India as more vulnerable and less ready than some of its peers (for example, China and Malaysia).

Figure 2: India is more vulnerable to rises in temperature than peers

Source: The Notre Dame GAIN Index

The government response has been mixed. It has set a net zero-by-2070 target and a target to reduce carbon intensity by 45% below 2005 levels by 2030. It aims to create 500 gigawatts (GW) of renewable energy capacity by 2030. While India missed its 2022 renewable energy target, it continues to expand its renewable capacity and has one of the fastest uptake rates in the world.

However, despite policies to encourage the transition from coal to gas in various industries (such as the ceramics sector in Gujarat), the government continues to support the use of coal to ensure energy security and meet the fast-growing demand for power as India’s population rapidly increases. India has the second-largest coal pipeline globally, and the draft National Electricity Plan4 projects another 26 GW of coal capacity will be installed by 2026-275. Such priorities need to be seen in the context of a country where millions of people still do not have access to reliable electricity.

Click here to learn more about 2023 corporate governance trends across emerging markets.

1 Global Emerging Markets Outlook (hermes-investment.com)
2 India takes off? | Financial Times (ft.com)
3 Labour force participation rate, female (% of female population ages 15+) (modelled ILO estimate) – India | Data (worldbank.org). Explained: Why Indian Women’s Workforce Participation Is Still Considerably Low (indiatimes.com).
4 DRAFT_NATIONAL_ELECTRICITY_PLAN_9_SEP_2022_2-1.pdf (cea.nic.in)
5 India | Climate Action Tracker

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This is a sponsored article from Federated Hermes.

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