If you believe that India must chose between either lowering its carbon emissions or eliminating poverty, then here is some reality therapy. A recent study by The Energy Research Institute (TERI) Europe makes the case that not only can India work simultaneously towards these two goals but that the financial instruments, by which to do this, are set to expand. The bad news is that, so far, both Indian companies and individual investors are not fully tuned into the importance of triple bottom line investing opportunities.

India is not alone in lagging behind. At present emerging markets attract only 0.1 percent of the US$ 3.7 trillion now managed by the criteria of 'responsible investing'. That is, investing which is based on Environmental, Social and Governance (ESG) standards. Grabbing a sizeable chunk of such international funds is not enough. The question is can Indian provide a lead in switching to technologies and business models which both spread prosperity and prevent the increasingly imminent environmental collapse.

First, a brief review of the prevailing scenario. The TERI report, titled Sustainable Investment in India: sustainable development of portfolio investment in India's publicly listed companies lists only nine companies as most likely to become significant holdings on the portfolios of global FIIs that employ ESG criteria. CalPERS, the California Public Employees Retirement System, now lists 72 Indian companies which 'pass' its ESG standards. (See: www.terrin.org for the report.)

Notably heavyweights like Hindustan Lever and ABB (India) feature on the fail list of CalPERS which, with US $ 210 billion in assets under management, is one of the world’s largest institutional investors. A variety of factors determine why a company falls in the fail category. These include: environmental damage, deaths at public protests against the company, use of child labour, disturbance to endangered species, infringement on indigenous people’s rights, discrimination on the basis of caste, religion or colour.

In April this year the United Nations’ Global Compact initiative launched the Principles for Responsible Investing (PRI) along with the New York Stock Exchange. The PRI provide a framework for aligning investment mandates, monitoring procedures, performance indicators and incentive structures with ESG criteria to ensure long-term returns to investors. Endorsed by investors representing total assets of US $8 trillion the PRI are a far cry from just a decade ago when it was believed that social and environmental concerns conflict with the fiduciary duties of money mangers. Now, the PRI explicitly makes ESG criteria an intrinsic part of fiduciary due diligence.

Why should India care? There is a substantial enough flow of conventional, non-ESG-filtered, investment into India. Yet the incentives for greater ESG engagement are powerful on two inter-related grounds – one, long term international competitiveness; and two, our internal aspirations to become a nation in which, finally, there is good quality of roti-kapda-makan for all.

TERI-Europe's report, which is the first of its kind, argues that ESG compliance would better differentiate Indian stocks in comparison to issuers from other emerging markets in the competition for long-term, high quality investors. Even more significantly it would boost “efficient allocation of capital to companies with business models and management qualities that are robust enough to succeed in the face of the ESG challenges in India and which contribute to environmentally sustainable and socially responsible development of the national economy” says the report, authored by Dan Siddy and Ritu Kumar.

However lofty this goal may seem to hardened single bottom-line managers, the promise of returns is tangible. How else can we hope to create market-based incentives for the innovation and entrenchment of technologies, such as renewable energy, that will enable us to both grow the economy and revitalise our environment. To accept our dependence on fossil fuels as a given for the foreseeable future is now suicidal. The recent report of the Intergovernmental Panel on Climate Change has left no doubt about this.

There are already scattered initiatives for sustainable technologies and businesses in India. Besides, David Gait, Portfolio Manager for Emerging Markets at First State Investments (UK) is of the view that the best Asian companies have always had a more holistic approach to profits. He suggests that India could build on the socially aware approach of many of its leading business groups which have been focused on triple bottom line returns long before the term was invented.

However, more intensive corporate social responsibility alone cannot provide what is now urgently needed, namely a profound shift which aligns production systems to maximise and regenerate natural resources. While public policies can facilitate this shift, even push it, government cannot be the doer. Thus the desperate need for sustainability oriented investment.

At present India, like China, has just a lone sustainable development investment fund. This is ABN AMRO’s Sustainable Development Fund, launched in March this year. The fund garnered Rs.60 crores, well below the expectations of its promoters. However, that is not bad for a maiden venture. The mere launch of the fund carries positive signals. The fund will chose from a range of companies which are being filtered by CRISIL for ESG performance based on public disclosures made by those companies.

CRISIL’s screening, based on extensive study of past records, has identified 245 companies, that both qualify on ESG criteria and consistently out-perform the old-style indicators like the BSE Sensex and Nifty, according to the TERI report. However, the study by Siddy and Kumar finds that most mutual fund managers are not yet engaged with creating sustainable investment products for the retail market.

There are two obvious reasons for this. The requisite tools and services for such innovation have so far been lacking. This gap will be partly removed when CRISIL launches the first Indian sustainability index early in 2008. But are there enough buyers? Will enough retail investors and financial institutions insist on ESG standards to be applied? At the moment, no one knows.

"Given that the global enthusiasm for India is all about expectations over decades, not merely days, months or currently even years, SRI is apposite in this country even for investors not primarily interested in political, social or environmental matters," says Nandan Maluste, Senior Vice President, Kotak Bank.

Dan Siddy, who has headed the department for sustainable financial markets at the International Finance Corporation (IFC), wonders why these trends have moved much faster in Brazil. After all, the Sao Paolo stock exchange has had a sustainability index for almost three years.

Subir Gokarn, head of CRISIL, offers an interesting speculation on India's slow pace. Perhaps our business community, and society at large, still expect the government to carry the full responsibility for development and environmental matters. The idea that private entrepreneurs can play a decisive role by adopting standards of higher and wider responsibility is relatively new.

However, it is important to note that the Socially Responsible Investing (SRI) trends now ascendant in the West took over three decades to grow. And they were incubated primarily by social non-profit entities which deployed share holder activism to pressurize listed companies to generate social and environmental returns, along with making money.

Fostering such intense social pressure for higher ESG standards will be the toughest part of the challenge ahead. At present the most passionate activist energy is caught in the trenches of confrontations like Singur and Nandigram. Those who are calling for a stake-holder model to resolve these disputes still appear to be on the margins – both within the corporate sector and within the social-activist realm.

Interventions like the TERI study, released in Mumbai on May 25, can help to break this stalemate. Its primary recommendation is that a national social investment forum be set up for providing both technical services and advocacy. Ideally, this should be an independent multi-stakeholder body promoted jointly by financial institutions and civic non-profit entities committed to promoting sustainable investment. This would bolster the energies of corporate managers who want to work for change from within and activists who can provide the required pressure from outside.