A story on equity

A good equity story will have to be sustainable.

ESG and sustainability will be a key theme across financing lifecycles. Venture Investors, PE Investors, Pre-IPO investors and IPO markets are increasingly demanding that equity stories, regardless of sector, include ESG adoption. ESG will flow into valuation assumptions with businesses commanding premium or suffering discounts based on their ESG strategy and reality.

FabIndia (“Fab”) is probably the first ESG IPO in India. Fab celebrates their rich ESG and impact history in their DRHP. Fab acknowledges the contribution made by its artisans and farmers with the Promoters pledging to gift about 7.5 lakhs equity shares to these less celebrated business contributors. Their DRHP touches upon their recycling initiatives, guidelines on the use of harmful chemicals across their supply chain, upcycling initiatives, promotion and use of traditional manufacturing methods, efforts to reduce energy consumption and use of green energy sources.

So, if you are fund raising in 2022 and beyond, whether through public or private markets, no matter which part of the world, all the more reason to ESG!

· The Triple bottom line approach

With a triple bottom line approach, companies would be required to think about their environmental and societal impact alongside their financial objectives. The triple bottom line focusses on “three Ps”: profit, people, and the planet. Profit demonstrating financial performance. “People” reflecting the business’s societal impact and “Planet” standing the impact on environment in a net positive way.

2022 will see a lot more focus on transparency, authenticity, measurement of ESG initiatives and Impact Metrics. The “fuzzy” “feel good” “green washing” days are behind us. “If you say it, you’ll have to show it and to show it you’ll have to measure it!”

· Tax SOPs and incentives to meet Net Zero goals

India has pledged to cut the total projected carbon emission by 1 billion tonnes by 2030 and move to net-zero carbon emissions by 2070. To fulfil these ambitious goals, we need suitable tax sops, a conducive regulatory environment and stable long term capital investments from development institutions and sovereigns. We need to promote R&D initiatives to foster indigenous technology and manufacturing capabilities.

 Budget 2022 may therefore see tax sops to promote green investments, incentives to promote use of green energy, subsidies and tax incentives for companies engaged in the clean tech and green sectors, recognition for Diversity, Equity and Inclusion (DEI initiatives) by corporates and more push to create transparent and governance driven corporate environment.

· ESG is likely to be key strategy

Covid associated disruptions, Green financing avenues, supply chain disruptions, consumer preference towards sustainable products, the brand image associated with “doing good” and enhanced regulatory risks and litigation associated with ESG, ESG and Impact discussions are now integrating with core business strategy often being monitored directly by the CEO’s office.

2022 will therefore see enhanced ESG related board discussions and participation in ESG matters by key corporate leaders demonstrating their commitment towards all stakeholders

· Enhanced ESG regulations, disclosure norms and transparent governance

In India, the regulatory landscape is fast evolving. Business Responsibility and Sustainability Report (BRSR) reporting which has been voluntary for FY 2021-22 will become mandatory from FY 2022-23 for the top 1,000 listed companies by market capitalization The new reporting requirements promote transparent, standardized disclosures on ESG parameters and sustainability-related risks and opportunities among listed companies in India.

The National Stock Exchange (NSE) launched NSE Prime, a category of companies that voluntarily agree to meet higher standards of corporate governance. Prime will provide investors with companies identified with higher governance standards, while the companies will benefit from brand reputation and potentially a premium on valuation.

2022 therefore will see continue progress on standardisation of disclosures nationally and internationally and unravel developments in areas like the creation of the International Sustainability Standards Board (ISSB), which aims to address concerns regarding the quality and consistency of ESG reporting.

Note: This is part of our ESG Series#3. I will continue to share my views as I learn along the way.