- April 18, 2022
- Posted by: CFA Society India
- Category:In Conversation With
Industry Expert: Namita Vikas, Founder and Managing Director of auctusESG
Interviewed by: Vikram Jhawar, CFA, Volunteer, Public Awareness Committee, CFA Society India
Climate change and ESG aspects of investing are bound to gain more prominence and it is imperative for all investment professionals to upskill themselves in these areas. We interviewed Namita Vikas, founder of auctusESG and an experienced leader in sustainability, to know more about these aspects and share them with you.
Vikram: You have had an impressive streak of various roles across domains/companies/international forums. What initiated you into ESG and Climate Change?
Namita: Issues related to society and the environment have been close to my heart ever since I was a student. The beginning of my career in public policy and research, working with government and businesses, reinforced the fact that it is not about hugging trees, but matters that are core to economic growth. In the early 90s, industries were plagued with social and environmental issues or impacted on account of floods or droughts. These external incidences hindered their ability to sustain their business activities or pay back loans on account of deteriorating balance sheets. My exposure to such aspects early in my career, strengthened my understanding of sustainability and ESG, and its interconnection with business growth and profits. Working with financial institutions internationally, or with UNEP FI for that matter, helped me gain more knowledge and enabled me to demonstrate how businesses stood at the crossroads of ESG-related risks and opportunities. From thereon, the focus has been on emphasising the need, and significance, of mainstreaming ESG and climate action, prioritising these for value-creation for both investors and stakeholders. Today, my firm auctusESG stands at the intersection of sustainability, finance and investments, working towards accelerating global sustainable finance and climate transition.
Vikram: What have been your biggest challenges when it comes to developing financial assets/instruments for climate change solutions from the issuer perspective? How do these instruments help corporates raise capital?
Namita: Kickstarting a market, without a level playing field or a common definition or taxonomy, is one of the biggest challenges when it comes to introducing green or climate-related financial products or solutions. Thankfully in India, there are clear guidelines for green bond issuances. That makes it an established product category, where the Indian issuances stand at 16.5 billion USD. However, when it comes to other products like sustainability linked loans, sustainability or social bonds, or green deposits, the acceptability, uptake and risk calibration are some challenges that are faced. Aside from this, financiers predominantly focus on risks, returns and short-termism. Climate change solutions often involve longer maturity periods, higher risks and combining impact with risk and return.
How these instruments help corporates raise capital differs with the instrument being availed. Some products refer to established Principles, which serve as guidelines for the issuance, project selection, use and management of proceeds, and disclosure on funded projects. These uses of proceeds include specific activities for which the funds may be used. While some focus explicitly on identified green categories, others may be general purpose corporate loans with an aim to kindle ESG-friendly behaviour by the issuer company. For the latter, the incentive may be a discount on the interest rate upon achievement of predetermined sustainability outcomes. Yardsticks may vary from principle to principle, their broad intention is to ensure funds are being used for the purpose they were intended for. A lot also depends on the structuring mechanisms used to create the financial product, whether a credit enhancement tool needs to be included to reduce the project’s perceived risks, and thus enable the issuer to raise that risk capital.
Vikram: How different is ESG from Climate Change apart from the latter being a subset of the former? Does Climate Change encompass majority of ESG related concerns at this point in time or are there other factors in ESG which are equally dominant? If you had to list 3 main issues of importance within ESG in the current times?
Namita: To understand these terminologies, it is best to start with sustainability. As per IFC, sustainability refers to ensuring long-term business success, by contributing to economic and social development and a healthy environment. An approach to achieving sustainability lies in the consideration of non-financial risks and opportunities, with respect to E, S and G parameters. In short, ESG is a set of parameters to screen investment opportunities for non-financial risks they might face. Thus, sustainability is the end, and ESG provides the means to that end. Climate change would primarily form a part of E of ESG, although climate also holds social ramifications, i.e., the S of ESG.
With regard to parameters of ESG outside of climate that are prioritised, it really depends on the material factors relevant for that company or project. As materiality varies, the relevant parameters within ESG would also vary.
As for three important issues that need to be addressed in ESG today:
- A wave of focusing on ratings as an additionality over and above the financial analysis, rather than embedding or integrating ESG into financial analysis
- Variation in the methodologies used across ESG rating providers, which hinders comparability and consistency of information
- Lack of knowledge and skills gap in the space, amongst financial and business sectors, especially within risk management
Vikram: You were instrumental in the first ever green bond issuance in India back in 2015. How do you feel about the progress we have made in this area since then? Do you think we are progressing at a steady pace given the idiosyncratic challenges of our economy or do you think we are lagging far behind or somewhere in the middle?
Namita: While the market stagnated in 2020 with $1.09 billion in issuances, 2021 saw a revival with nearly $6.1 billion in issuances over 11 months, of which most were by corporations. The Indian market needs more issuances from financial institutions, as it would then bring in volume, create a multiplier effect and maximise impact. The sovereign green bond announced in the Union Budget 2022 would help provide much-needed impetus to scale up the green bond market further and provide a diverse base and high quality of investors. Standardisation with a uniform green taxonomy, would also help evince enhanced interest from issuers and sources of green capital. The BRSR guidelines for sustainability disclosures are a step in the right direction and the Ministry and regulators in India are further strengthening this space for uptake of sustainable finance. As India moves towards its net-zero commitments, and Indian companies move to fulfil their net-zero pledges, sustainable finance as a new type of capital is bound to be unlocked.
Vikram: In 2020, you founded auctusESG – a global advisory firm for sustainable development and climate transition. Financers and Investors have started incorporating climate change in their investment decision-making process. Do you think there is also a non-economic/non-financial angle when it comes to advising (or at times persuading) funds or investment managers on sustainable investing and climate change?
Namita: Traditionally financial institutions take a “risk-return” approach to investments or lending. The new approach that we advise our clients on is “risk-return-impact” as the intent is to foreground the material risks and opportunities, and the potential for an investment loop while looking at sustainable finance and ESG. For instance, issuing a green bond not only helps capitalize on opportunities emerging from transitioning to a low-carbon economy, but also, reduces the risks related to investing in assets impacted by potential physical and transition climate risks, and helps build reputation and brand image by aligning business towards sustainability goals, outcomes and impact. Such holistic strategic inputs do stimulate demand, creating avenues for issuances or product development. We strongly believe that ESG is intrinsically linked to financial performance and there is enough evidence to substantiate it. It is therefore important to embed ESG or climate risk assessment into financial decision making. Institutions have started to see the merit in incorporating ESG and we work with them on building sustainable finance and climate strategy, ESG & climate risk assessment methodologies or enhance skills for risk and credit officers through high quality training.
Vikram: Climate Change and ML/AI are the two most buzzed areas at present. Albeit the two are very different and not mutually exclusive, is there any intersection of the two as we are hearing a lot of applications of analytics for climate actions?
Namita: Emerging technologies like ML, AI and others are an enabler that help execute sustainability and climate action projects with effectiveness and efficiency. That includes the finance sector, which can leverage such technologies to create tools that help them better measure risks, track data and monitor impact, thus aiding better financial decisions. Technology not only helps in understanding climate dynamics, but also the efficacy of climate action programs. Having said that, technology has brought new challenges. For example, data centres running on fossil fuels negate climate action to an extent. There are also criticisms related to data privacy in datasets used in machine learning. Therefore, applying AI/ML to offset climate change would need to be looked at holistically, and check whether the solutions are unintentionally leading to new problems.
Vikram: What are some of the skills and tools required for an advisory firm like yours to successfully navigate challenges of your clients?
Namita: I think one of the most important perquisites for a firm like ours is the practitioners’ knowledge and experience in Sustainable finance and ESG. Having worked in a financial institution, helps in understanding its working and therefore providing apt solutions to clients becomes less challenging. I clearly saw a big gap at the intersection of sustainability, finance and investments and therefore, established auctusESG to fill in this gap. Other attributes include an understanding of both finance and sustainability concepts, its application to address real-world situations, ability to build solutions and its operationalisation. In terms of tools, every advisory project is different and requires a customised approach. However, having templates or frameworks that categorise material risks and issues, which can be customised for a client or sector, helps. auctusESG prides itself on its practitioner’s knowledge to apply and operationalise sustainable finance, ESG and climate risks for clients, including banks, asset managers, asset owners, corporates and governments. Within a short period since inception, it has worked on marquee projects with institutions from across Europe, Asia and Africa. The firm in this manner works to positively contribute to sustainable development and decarbonisation, by facilitating clients globally in the development of sustainable finance strategies & products, integrate ESG & climate considerations into investment decisions, and influence policies to direct public & private capital to sustainable investment.
Vikram: For young professionals curious about ESG, what would be your advice on how to start, self-preparation and medium to long-term expectations/goals?
Namita: Development of intellectual rigour is crucial, to bridge the gap in knowledge and skills. The plethora of ESG jobs in recent years, has opened up a new sector for young professionals. This is certainly the next big boom after technology and the unique challenges associated with mainstreaming sustainability and climate into business and finance decisions, will require a different and innovative mindset led by critical thinking and intellectual rigour.
Namita Vikas is the Founder and Managing Director of auctusESG. She is a senior business leader with 30 years of diverse global experience in climate strategy and sustainability across sectors including banking, technology and FMCG, with a particular focus on sustainable, climate and green finance, climate action, ESG & Climate Risk Management. She was instrumental in launching a number of green and sustainable, wholesale and retail financial products and has contributed to raising over USD 1 billion as capital and credit lines. Under her able guidance, the first ever Green Bond of India was issued in 2015 and accreditation was awarded from Green Climate Fund (GCF). She founded auctusESG in 2020, a global expert advisory on sustainable finance and ESG, which was awarded India’s SME Leadership Champion, by UN Women 2021 Asia-Pacific.
Vikram Jhawar, CFA currently works in Risk Management at Morgan Stanley and has 8 years of industry experience working across Risk, Portfolio Analytics and Change Management domains. Within Risk management, he specialises in Counterparty Risk. He holds an Integrated Masters from BITS Pilani and is a CFA Charterholder since 2017. In his spare time, he likes to cook, explore nature on his bicycle & spend time with his dogs.