Retail NBFCs Strengthen ESG Commitments Amid Rising Sustainability Focus: Icra

The transformation towards sustainability has entered into the core of the finance industry with retail Non-Banking Financial Companies (NBFCs) taking an important part in fostering responsible and inclusive economic growth. Such financial institutions are now continuously evaluating their operations with global sustainability goals and showcasing their commitment towards environment, social, and governance (ESG) principles, according to Icra ESG Ratings' report.

Key environmental indicators like GHG emissions and energy have demonstrated favorable progress across with a decline of 19% and 7%, respectively, over a three-year period ending FY2024. The renewable energy adoption pace has remained slow; however, half of the surveyed entities has achieved 100% waste recycling. 
In FY2024, about 31% of the wages were paid in rural areas by the sample set, up from 28% in FY2023, as per the report. In addition, their community spending through Corporate Social Responsibility (CSR) projects grew by ~24% in the same period with a healthy budget utilisation of 97%. 

The average spend per entity in our sample rose to ~Rs. 50 crore, focusing on healthcare, education, and skill development. Continued focus on the pace of implementation and well-rounded CSR programs will enable the sector to enhance its external social impacts, showed the report.

The survey is increasingly aligning with the United Nations Sustainable Development Goals (UN SDGs), showing sustainability proactiveness. About 60% of the sample set has already aligned with 12 of the 17 UN SDGs, with special focus on SDG 3 (good health and well-being), SDG 8 (decent work and economic growth) and SDG 11 (sustainable cities and communities). ICRA ESG expects the leading NBFCs to identify initiatives for contributing to and aligning their lending practices with the key UN SDGs, going forward.

The report also highlighted that top 10 retail-NBFCs had a loan portfolio dominated by small ticket loans in the vehicle, personal and business loans categories. In the light of the beneficiary profile, the sector is well positioned to create a meaningful social impact by enabling better access to credit and financial inclusion. 
On an average, the sector does not have a major gap in wages between male and female workers, however, this ranges between 0.65–1.60 times, indicating an improvement area for some entities. However, gender diversity remains modest. For ICRA ESG’s sample set, diversity has been stagnant over the last four years ending FY2024, hovering around 12%. In the context of board composition, on an average, the percentage of women on the board stood at 14.2% in FY2024, up from 13.6% in FY2022, indicating an area of improvement.

The environmental impact of a financial services entity is typically modest but varies with its geographical presence and employee base. For ICRA ESG’s sample set, absolute energy and greenhouse gas (GHG) emissions declined by 7% and 19%, respectively, on an average over the period FY2022–FY2024. During the same period, revenue-based intensity showed a reduction of approximately 34% and 46%, despite a 13% increase in branches, indicating improved efficiency. Renewable energy usage remained low at 13% on average for the sample set, but waste recycling rates improved significantly by approximately 65% during FY2022–FY2024, with five NBFCs achieving 100% recycling of waste in FY2024. 

The ESG commitments increased significantly, with six NBFCs setting defined sustainability targets, reflecting a growing focus on responsible practices. Notable ESG initiatives included Bajaj Finance Ltd.’s (BFL) reduction of paper consumption and installation of 626.80 KW rooftop solar plants, and Cholamandalam Finance’ (CIFCL’s) expansion to 252 branches in under-banked districts. Also, Mahindra Finance (MMFSL’s) alignment with UN Global Compact Network and SBTi-validated targets are initiatives showcasing its alignment with sustainability.