Businesses with strong links to Europe, U.S. have better Sustainability Scores.
Knowing how companies are handling the most relevant environmental, social, and governance, or ESG, issues facing their businesses can help investors make better decisions. This is especially true in emerging markets such as India, where environmental and labor standards, the quality of corporate governance and corporate transparency overall are generally lower than in developed markets.
Company-level ESG research, on the whole, indicates that emerging-markets companies are less likely than their developed-markets counterparts to have policies, management systems, governance structures, and disclosure standards in place to manage their ESG-related risks. Against that backdrop, identifying those emerging-markets companies that do relatively well on sustainability metrics could lead investors to higher-quality companies that mitigate some of the risk that accompanies emerging-markets investing.
Using company-level ESG research from Sustainalytics and Morningstar country and emerging-markets indexes, we evaluated the ESG scores of companies in India relative to emerging markets generally and identified top- and bottom-performing sectors, as well as the individual companies that are setting the standard for managing the most important ESG-related risks and opportunities. We found that Indian companies compare favorably to emerging markets overall, mainly because of the outstanding ESG profiles of India’s large information-technology services firms, whose businesses are strongly linked to Europe and the United States.
The largest firms in India are required to report on sustainability issues. In place is a regulatory framework for reporting that reflects the demands of stakeholders, including foreign investors, for insight into how Indian companies operate on sustainability issues.
The 500 largest Indian companies by market capitalization are required to issue an annual Business Responsibility report based on the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, a set of India-specific principles aiming to inculcate responsible business conduct. In addition, the Company Law, enacted in 2013, requires large companies (including foreign multinationals doing business in India) to earmark 2% of their average trailing three-year profits to corporate social-responsibility efforts.
The Bombay Stock Exchange was the first exchange in Asia to join the United Nations Sustainable Stock Exchanges Initiative, which aims to enhance corporate transparency and performance on ESG issues in order to encourage sustainable investment. 1
How India Stacks Up
India fares well relative to other emerging markets on ESG metrics. Exhibit 1 tracks the Sustainability Score of the Morningstar India Index since 2012 relative to that of the Morningstar Emerging Markets Index. The indexes’ Sustainability Scores are value-weighted averages of the scores of companies held in the indexes. Each company receives an ESG score relative to its global industry peer group based on its disclosure of ESG policies and management systems, its performance on a number of ESG metrics, how well prepared the company is to address key ESG issues facing its business. We make deductions from that score for companies embroiled in ESG-related controversies, with information collected and categorized based on stakeholder impact and material risk.