- April 8, 2023
- Posted by: CFA Society India
- Category:In Conversation With
Industry Expert: Vibhuti Garg, Director, IEEFA, South Asia
Interviewed by: Labanya Prakash Jena, CFA, Regional Climate Finance Advisor, Commonwealth Secretariat
India’s quest to decarbonize and grow the economy simultaneously needs structural and institutional changes in the economy and financial system. Recently, there has been a flurry of policy and regulatory actions in the economic system to decarbonize the economy. These changes will have repercussions on businesses and investments, and the financial market is reacting to these new dynamics.
In a candid interview, Ms. Vibhuti Garg, Director, IEEFA, South Asia, shared her thoughts on these new dynamic forces and their implication for businesses and the financial market:
Labanya: The Government of India signaled introducing carbon pricing in India. As an investor why I should be worried about carbon pricing?
Vibhuti: A carbon pricing regime has the potential to significantly affect the business model and hence the profitability of several high emitting industries which have operations dependent upon the production or consumption of fossil fuels. A carbon tax regime along with an emission trading system will force industries such as steel, refineries, cement, chemicals etc. to switch to low carbon technologies. Which can make several players uncompetitive. Hence any investor with an exposure to such sectors faces a climate transition risk in their portfolio.
Labanya: Just after COV-19, several mutual funds launched ESG funds, but it stopped suddenly. Globally however capital flows are increasing to ESG funds. What explains the India story?
Vibhuti: There could be several reasons which can contribute to ESG funds drying up in India. One is the absence of dedicated green capital in India. There are very few domestic entities that consider ESG in their investment decision making process. Hence domestic institutional investors such as banks and insurers may not prescribe additional value to ESG aligned investments.
Labanya: On a related note, how should Indian investors approach ESG funds where information disclosure by the funds is still limited?
Vibhuti: Transparent, consistent, verifiable, material, and all-encompassing disclosure are the bedrock of informed decision making on ESG investments. In the absence of such disclosures either there are greenwashing risks or mis-selling risks for investors. For any fund marketing ESG investments, the investor should seek out how the fund manager is planning to bridge the data gap, how does she incorporate ESG considerations and what is the process of selection of investments (including eligibility criteria).
Labanya: There is a lot of discussion on ESG rating. Academic papers suggest that ESG ratings among rating agencies are not uniform like credit rating, making it difficult to differentiate between good and bad companies. As an investor how can I best judge the ESG risks of any company?
Vibhuti: ESG ratings space is very dynamic at the moment with each provider having their own methodology and data sets to come out with ratings. Further, definitional differences of what the rating actually measures (such as impact or risk) make the rating space more confusing. In such a scenario, it becomes pertinent for investors to be sure of the methodology of the rating product, its definition and the use of third party data.
Labanya: RBI came out with a slew of recommendations to integrate sustainability and climate change in the banking sector. How will it change things in your opinion?
Vibhuti: RBI’s recommendations on prudential regulations, disclosure requirements and stress tests, and scenario analysis are in line with developments by other central banks globally. These have two main objectives. Firstly, to inform the banks and RBI on the climate risk on the regulated entity’s books and the overall financial system. Secondly, to inform the investors of such banks and NBFCs on their climate risk strategies, governance, processes, and metrics. Both these have the potential to nudge banking institutions to diversify their lending books away from fossil fuel assets and towards more clean energy assets and thus providing more capital for low carbon technologies and assets.
Labanya: India’s green economic transition needs trillion of dollar in the next 2 to 3 decades. Where does the Government stand on green finance? And how can investors make use of this opportunity for the need for large capital?
Vibhuti: Developments such as the issuance of a sovereign green bond point towards the government’s intent to finance the transition through green capital. With a target of net zero by 2070, the whole economy needs to transition. This means that investment opportunities will be ample in all sectors.
In the short-term, power sector transformation, electrification of transport, industrial decarbonization, and carbon credit trading are some themes that can provide good investment opportunities. Any firms that have aligned their business model to capitalize on these themes will stand to gain as the economy transitions.
Vibhuti Garg, Director, Institute for Energy Economics and Financial Analysis (IEEFA)South Asia, has advised private and public sector clients on commercial and market entry strategies, investment diligence on power projects and the impact of power sector performance on state finances. She also works on international energy governance, energy transition, energy access, reallocation of fossil fuel subsidy expenditure to clean energy, energy pricing and tariff reforms.