Actively aware: India’s institutional investors are embracing climate materiality

Of all the reasons investors seem drawn to India, scale is perhaps the most obvious. With a population of 1.4bn and a projected real GDP growth rate of 6.5% between now and 2030, India is home to one of the world’s fastest growing pools of both energy demand and GHG emissions.

Fair to say, therefore, that India’s energy transition matters outside its borders as much as it does inside it.

There is a vision this transition is chasing. By 2030, the government expects 50% of energy demand to be serviced through renewables. Latest estimates from the Council on Energy, Environment and Water (CEEW) suggest this could translate into 600GW of clean energy needed by the end of the decade. That is 100GW higher than the government’s current ambition.

The viability of its transition depends in part on how India's investors choose to allocate their capital. New analysis from the Asia Investor Group on Climate Change (AIGCC) sheds some light on the state of play. It finds that India’s institutional investors are increasingly embracing the financial materiality of climate change.

Actively aware

The AIGCC’s research covers 15 of India’s largest institutional investors. Collectively, they represent $1.2trn in assets under management. The findings suggest that 60% of them are acting on the belief that climate risks and opportunities are financially material. Which is to say they are being incorporated into investment decisions.

One possible explanation is that India’s vulnerability to physical risks, of which extreme weather events are a part, is increasingly evident. 2024 was India’s warmest year on record since 1901. In April this year, New Delhi experienced its warmest night in six years. A heatwave warning is currently in effect for the northwest state of Rajasthan.

“Everyone in India is acutely aware of the severe impacts of weather-related disasters driven by global warming, so the stakes are high”, says Bhavesh Bajaj, ESG analyst at HDFC Asset Management. “As long-term investors with fiduciary responsibilities to our beneficiaries, we are dedicated to addressing climate risk’, he adds.

Steering corporates

Indian investors are also integrating climate materiality into their conversations with corporates. 53% of those surveyed by AIGCC have integrated climate into their oversight of India Inc.

Climate-related shareholder resolutions are still largely untested waters in India. The right to file one is dependent on the company’s charter documents. Additionally, given the prevalence of family ownership and controlling entities with significant voting power, the ability of such resolutions to influence corporate behaviour is arguably low.

All is not, however, lost. A white paper by the Commonwealth Climate and Law Initiative (CCLI) found that there appears to be some legal basis under Indian company law for investors to hold directors accountable for environmental protection. In addition, in 2021, India’s securities regulator – SEBI – announced mandatory climate disclosures for India’s top 1000 listed companies beginning in 2022.

“We are encouraged by the progress that Indian investors have taken in engaging companies to decarbonise, and we see significant opportunities to expand this engagement, particularly with state-owned enterprises in the electric utility sector, which is critical to the energy transition”, commented AIGCC chief executive Rebecca Mikula-Wright.

Pending progress

The AIGCC findings also highlight domains for pending progress. Short-term targets are yet to be set by India’s institutional financiers. Their climate scenario analysis activities are not public information and internal climate policies are few and far between.

Pending progress aside, India’s institutional investors are unlikely to steer India Inc’s decarbonisation on their own. What is true of institutional investors globally is also true in India – policy tailwinds go a long way and headwinds could be costly.

“Indian investors are also looking to the government to establish clear and ambitious energy policies that prioritise clean energy adoption”, adds Mikula-Wright.

In March this year, CEEW released a first-of-its-kind view of India’s power system dispatch for every 15 minutes in 2030. The model found that if future power demand outpaces projections, a pathway of 600GW of renewable energy is the most viable solution.

“India’s energy transition must match its economic ambitions. We need to plan for a high renewable share today to send the right market signals for tomorrow. Scaling up to 600 GW of non-fossil capacity by 2030 requires a future-ready policy and regulatory framework”, said Suresh Prabhu, a former union minister of commerce and industry.

An embrace of climate materiality by India’s institutional investors comes at a critical juncture. While 46% of India’s power is still being sourced from coal, the pace of the country’s solar-driven renewable energy roll-out is at record highs.

Which of the two simultaneous realities will have the upper hand, come 2030, has a lot to do with the decisions India’s investors will make in the years to come.