India’s Top 12 Asset Management Companies Do Not Address Climate Change

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A new study by Climate Risk Horizons finds that India’s top 12 Asset Management Companies (AMCs), managing over $5.33 trillion in mutual funds, are yet to address climate risks in their portfolios. The report reveals that most AMCs lack coal exclusion policies, do not disclose financed emissions, and are yet to conduct climate stress tests, posing significant risks for investors.

India’s largest Asset Management Companies (AMCs) are ignoring climate risks in their portfolios, according to thinktank Climate Risk Horizons.

In a first-of-its-kind analysis, the group assessed the climate-preparedness of India’s top 12 AMCs, which collectively managed around $5.33 trillion in mutual funds for FY 2023-24. For India to meet its climate and sustainability goals, the mutual funds industry needs to ensure that these assets are wisely invested such that its portfolio is compatible with a Net Zero future. This places the responsibility of steering capital towards a Net Zero future on AMCs, who are entrusted with managing the portfolios of mutual fund companies.

The study scores AMCs on ten criteria such as Responsible Investment, Board Oversight, Coal Policy, ESG Integration, Stewardship and Net Zero Targets to find that Asset Management Companies in India are not yet playing a meaningful role in India’s transition to a low-carbon economy.

Most AMCs still don’t have exclusionary policies to end investments in the coal sector and do not disclose the amount of carbon emissions they directly finance. Kotak Mahindra Asset Management Company is the only one to exclude coal from its ESG scheme. Similarly, only Nippon Life India AMC has adopted a target to transition to low-emission portfolios. No AMC has conducted climate-related scenario analysis or stress testing of their portfolios.

While a couple of AMCs are at the nascent stage of prioritising climate risks through emissions reporting, almost all report an “active ownership” approach wherein they engage with investee companies on ESG issues. Less than half of the AMCs have established formal organisational structures to oversee climate issues, while two-thirds offer ESG or sustainability-themed mutual funds. A majority of the 12 AMCs assessed are signatories to the United Nations Principles for Responsible Investment (UN PRI).

Despite these initial steps, most AMCs act only on criteria that are mandated by SEBI and limit their climate-preparedness efforts to ESG-specific funds.

“Asset Management Companies must treat climate risk as the core financial challenge it is by strengthening Board oversight, stress testing, and meaningful disclosures. There is a need to expand sustainable investment products to address both sides of the gap: the limited supply of innovative, low-carbon/ESG funds and the slow investor uptake in ESG offerings. With clear, AMC-specific disclosure standards and robust regulatory measures, investor confidence will increase, driving the market toward a more sustainable, low-carbon future”, said Sagar Asapur, co-author of the report.

“Today’s retail investors are highly exposed to climate risks through equity schemes. Sectors like transportation and construction are vulnerable to physical risks from extreme weather events, while investments in the auto and power sectors are exposed to transition risks amid changing policies,” said Ritaj Kalaskar, co-author of the report. “AMCs have a pivotal role to play in steering all sectors towards India’s climate goals and stable, long-term returns. Factoring climate risk-return considerations into investment decisions is needed to scale up high-quality ESG funds and help investee companies decarbonise their supply chains”, he added.

The scores of the 12 AMCs are as follows:

The report recommends the following urgent steps to enable AMCs to prioritise climate action:

● SEBI, as the market regulator, must mandate comprehensive climate disclosure standards that are specific to AMCs and enable the calculation of financed emissions and the conduct of climate-related stress testing.

● SEBI must align its latest industry classification with the promised Climate Finance Taxonomy announced in the Union Budget 2024–25 and make provision for climate positive sectors such as clean energy or public transportation.

● SEBI must strengthen its mandatory Stewardship Code by requiring AMCs to submit detailed compliance reports that include case studies and specific examples of engagement with investee companies.

● AMCs must be required to strengthen their overall operations.

Climate Risk Horizons’ work highlights the systemic risks that disruptive climate change poses to investors, lenders and infrastructure investments. Through a data-driven, research-oriented approach that incorporates a holistic understanding of climate policy, energy infrastructure and regulatory processes, CRH provides advice on risk management strategies to minimise stranded, non-performing assets and economic disruption in the face of climate change.

The writer of this article is Dr. Seema Javed, an environmentalist & a communications professional in the field of climate and energy