ESG Trends: Indian Firms vs. Global Giants
Do Institutional Investors Care about ESG Performance? – A Study of Indian Firms In the past few years, academicians, policymakers, and regulatory bodies have given conscious attention to sustainability. Sustainability in business means integrating environmental and social issues into business practices and strategies.
Researchers have also observed that Indian companies have broadened their perspectives toward stakeholders, shifting from focusing solely on profits for a select few to creating an ideal environment for the public, consumers, employees, the environment, and society at large, ultimately aiming for good corporate governance.
Management is now required to be accountable to even non-shareholder interests while considering important decisions. Corporate governance has started playing a fundamental role in evolving and shaping the overall business environment. The importance of ESG (Environment, Social, and Governance) is therefore inevitable as it provides a sustainable structure to firms for becoming resilient using a holistic approach 14 to growth while not compromising on profitability.
Moving further, it has been observed that nowadays, socially responsible investors (SRIs) evaluate the ESG performance of firms and that is why firms have started opting for ESG disclosures in their annual reports.
Previous studies also support that in the long run, socially responsible firms outperform their counterparts due to higher support from various stakeholders, better governance regimes, and efficient resource allocation.
In India, The SEBI introduced ESG reporting in 2012 and called it the Business Responsibility Report (BRR). The BRR framework aims to encourage companies to adopt responsible and sustainable business practices.
In 2015, SEBI extended the requirement to the top 500 listed companies by market capitalization. On July 12, 2023, SEBI issued a circular that requires the top 250 listed entities by market capitalization to disclose ESG information for the 2024–2025 financial year.
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This research examined the impact of institutional ownership on the firm’s sustainability behavior in the Indian context. Past studies have proven that a firm’s ownership structure affects its decision-making and risk appetite’ and also that there is a relationship between a firm’s governance structure and its CSR.
In India, it is found that institutional investors have heterogeneous behavior towards CSR expenses. Also, when it comes to ownership patterns, firms in emerging economies are different from developed nations. India has the majority of firms that have either dominance of family ownership or have been owned by business groups, unlike developed nations.
This study attempts to investigate whether firms with higher institutional ownership significantly and positively impact ESG ratings. It assumes that firms where institutional owners hold a larger percentage of shares are more likely to achieve higher ESG ratings, potentially creating long-term value for investors. The research examines BSE 500 (Non-Banking, Non-Financial Companies) over an eight-year period from 2013 to 2020.
Group Discussion Topics
The impact of Institutional Ownership (IO) on ESG performance was studied using appropriate statistical tools. The results identified an inverse association between institutional ownership and socially responsible parameters. Institutional investors recognize the importance of sustainability and therefore make investments in the firm that has a higher rating but in the case of India, results are contradictory.
India exhibits weak corporate governance, with most businesses controlled by family groups. Additionally, R&D intensity negatively impacts ESG scores, indicating that R&D expenses are not directed toward sustainability or ESG-focused areas.
This study fills the gap by depicting a lack of institutional focus on ESG performance. Results are very useful to regulators as they should make concrete policies that can enhance ESG performance, regardless of ownership. Emerging nations also have clear aims to attain their stipulated targets under the SDG-2030 agenda.
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These results indicate that agencies need to take significant steps considering the results of this study. Investors who are socially responsible (SRIs) should also consider ownership structure while assessing the BRR/ESG/Financial reporting of the firm.
The full research paper can be accessed here DOI: Mulchandani, K., Mulchandani, K., &; Jain, Megha. (2023). Do institutional investors care about ESG performance: evidence from India. International Journal of Indian Culture and Business Management, 29(1), 136-149.
DOI: https://doi.org/10.1504/IJICBM.2023.130932
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