The Future of ESG-Aligned Financing in India: A Path Towards Cheaper Credit

Author: Aishwarya K

Sustainability reporting is gaining prominence as an essential business practice, offering transparency and accountability in how companies address Environmental, Social, and Governance (ESG) issues. Globally, robust ESG frameworks are unlocking opportunities for companies to secure credit at lower costs. As India aligns its sustainability reporting requirements with global ESG standards, businesses here are poised to benefit similarly. It is only a matter of time before Indian firms with strong ESG credentials gain enhanced access to capital markets and financing at favourable terms.

Global ESG Trends in Financing

Across the globe, financial markets have recognized the value of ESG as a risk mitigator and performance enhancer. Financial institutions are embedding ESG factors into their credit appraisal processes to evaluate the sustainability of investments. This trend is evident in several regions:

1. Europe’s Comprehensive ESG Frameworks:

The European Union (EU) leads with stringent ESG reporting requirements, such as the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR). These regulations compel companies to disclose non-financial risks and impacts, creating a foundation for ESG-linked financial instruments like green bonds and sustainability-linked loans.

2. North America’s Focus on ESG as Risk Management:

In the United States and Canada, institutional investors and lenders are prioritizing ESG disclosures to identify financially resilient companies. Entities with strong ESG practices enjoy better credit ratings and reduced financing costs, thanks to the integration of sustainability into risk assessments.

3. Asia-Pacific’s Emerging ESG Financing Models:

Countries like Japan, Singapore, and South Korea are developing ESG-linked financial products, including green loans and ESG-compliant investment funds. These initiatives demonstrate that ESG is becoming a universal language in credit markets.

India’s Sustainability Reporting Journey

India is making significant strides in adopting ESG principles, primarily through the Securities and Exchange Board of India (SEBI)’s Business Responsibility and Sustainability Reporting (BRSR) framework. Effective for the top 1,000 listed companies, BRSR represents a significant step toward integrating sustainability into business practices.

Key aspects of BRSR include:

• Alignment with the National Guidelines on Responsible Business Conduct (NGRBC), which cover social, environmental, and governance parameters.

• Structured disclosures encompassing themes such as resource efficiency, community development, and corporate governance.

• A focus on transparency and comparability, mirroring international ESG frameworks like the Global Reporting Initiative (GRI) and Task Force on Climate-related Financial Disclosures (TCFD).

While BRSR currently focuses on listed companies, its principles can be extended to other sectors, paving the way for broader adoption of ESG-aligned reporting in India.

Potential Benefits of ESG in Credit and Financing

Globally, companies with robust ESG reporting frameworks benefit from reduced costs of capital and better access to credit. As India aligns its sustainability practices with international norms, these advantages will likely materialize here:

1. Cheaper Access to Capital:

Banks and financial institutions view companies with strong ESG practices as lower-risk borrowers. This can lead to reduced interest rates, particularly through instruments like green bonds and sustainability-linked loans.

2. Improved Investor Confidence:

International investors prioritize ESG-compliant portfolios. Companies with BRSR-aligned practices will attract greater foreign investment, gaining access to larger capital pools at competitive rates.

3. Enhanced Credit Ratings:

Credit rating agencies globally are integrating ESG metrics into their methodologies. Indian rating agencies may follow suit, giving ESG-compliant companies higher ratings and better borrowing terms.

4. Availability of ESG-Specific Financial Products:

Green bonds, already issued by several Indian entities like the State Bank of India (SBI) and Power Finance Corporation, signal the rising importance of ESG-aligned financing. As the market matures, these instruments will become more accessible to companies meeting sustainability benchmarks.

Parallels from Global Markets

The global success of ESG in financing offers a blueprint for India:

• Green Bonds: Globally, green bonds have emerged as a vital financing tool, helping companies raise capital for projects with environmental benefits. Indian firms, including NTPC and HDFC, are beginning to tap into this market.

• Sustainability-linked Loans: Internationally, businesses like Apple and Unilever have secured loans tied to ESG targets, benefiting from lower interest rates upon meeting sustainability goals.

• ESG in Credit Ratings: European credit rating agencies actively integrate ESG metrics. A similar approach in India could redefine how financial risks are assessed, promoting ESG practices across industries.

Challenges and Opportunities in India

While India’s ESG journey is promising, several challenges must be addressed:

• Data Quality and Consistency: Standardizing ESG metrics and ensuring reliable data collection are critical for effective implementation.

• Awareness Among Smaller Firms: Extending ESG reporting practices beyond large corporations to MSMEs will require targeted education and incentives.

• Regulatory Evolution: Ensuring alignment between BRSR and global standards like GRI and TCFD will enhance India’s credibility in international markets.

Opportunities abound for businesses that proactively adopt ESG:

• Differentiating themselves in competitive markets.

• Gaining early-mover advantages in ESG-linked financing.

• Contributing to India’s broader sustainability and climate goals.

A Vision for the Future

As global investors and financial institutions prioritize ESG, the integration of sustainability into credit and financing decisions is inevitable in India. Robust frameworks like BRSR are laying the groundwork for a transformative shift in how Indian companies access and use capital. By aligning sustainability reporting with international ESG standards, Indian businesses can unlock cheaper credit, attract global investors, and drive long-term value creation.

The parallels with global markets show that the benefits are tangible and within reach. With regulatory support and corporate commitment, ESG-aligned financing will soon become a cornerstone of India’s economic landscape, empowering businesses to grow sustainably while contributing to a greener, more equitable future.