Post-pandemic, global Environmental, Social, and Governance (ESG) investing picked up momentum as investors perceived Covid-19 as the century’s first “sustainability” crisis. Based on an EY report, 90% of international investors looked for a company’s ESG performance, and 86% brought corporate decarbonisation to the priority in their investment checklists.
In India, ESG is still in its infancy, with only 25 out of 5,180 investors becoming signatories of the United Nations Principles of Responsible Investing (UNPRI). However, global assets managers, private equity funds, sovereign wealth funds, and pension funds started pouring capital into multiple clean energy companies and green business operations.
Why is ESG important in India?
In the Paris Agreement of the United Nations Climate Change Conference in 2021, India’s Prime Minister committed to achieving net zero emissions by 2070. Accordingly, corporate entities must integrate ESG principles to safeguard the environment, the interests of various stakeholders, and business sustainability as a whole.
Motivated by a multi-trillion dollar global pool of ESG driven capital, Indian companies are rapidly incorporating ESG into their holistic business strategy. They acknowledge that their responsibilities do not restrict to monetary returns but extend to etching a positive social and environmental impact. ESG adoption will boost corporate growth, enhance the public image, and help companies raise capital at lower costs.
Status of ESG implementation in India
Companies in high-emitting sectors like industry and energy face stringent scrutiny by the Government. The Securities and Exchange Board of India (SEBI) also made ESG disclosures mandatory for the top 1,000 listed companies under its Business Responsibility and Sustainability Reporting (BRSR) initiative. India has a defined mandate for Corporate Social Responsibility (CSR) for companies with Rs 5 billion net worth, Rs.10 billion turnover, or Rs.50 million net profit. These companies must spend at least 2% of their net profits on CSR endeavors and disclose their ESG profiles to attract capital from global ESG investors and financiers.
Post-COVID, India’s banking and non-banking sectors have urgently switched focus to sustainable development. The RBI joined the Network for Greening the Financial System (NGFS) to contribute to global green finance and drive India’s financial sector towards policy formation and climatic risk resilience development. The bank also focused on stress testing, strategy building, capacity building, and risk governance structure to address climate risk issues. Moreover, the State Bank of India formulated ESG-compliant lending policies for companies, pushing them to act more responsibly.
Forward-looking organisations started reporting their ESG performances complying with globally-accredited frameworks such as GRI, TCFD, and IR. Even unlisted companies voluntarily disclose their ESG exercises based on the BRSR-lite format. Many large global investors have adopted well-defined ESG policies in their due diligence and investment monitoring processes. They capitalise on opportunities to promote ecologically impactful investing and environmental sustainability. On the other hand, investors perform exclusionary screening for socially sensitive companies and avoid investing in entities with poor ESG parameters. However, the Indian corporate ecosystem is still at an early stage of optimising its transition strategy, financing requirements, and ESG profiles.
Where lies the missing link in ESG for companies to adopt?
While ESG commitments stand on three pillars, the ‘S’ is typically a missing link between business strategy and regulatory compliance. Employment generation is a big challenge in India, and the government is pushing hard to absorb employable youths through mega employment drives. It aims to create 1 million job opportunities with 890,000 vacancies in ministries and central departments Similarly, private companies should also consider recruiting apprentices and diversifying workforces as a part of their CSR initiatives. However, startups are trying to cope up with the funding winter. Since the social impact is difficult to quantify, SEBI has constituted an advisory committee that aims to enhance BRSR and develop a parallel approach for standardising social metrics.
What are the top 5 ways for beginners to get started with ESG?
Indian companies can lose Rs.7,138 billion due to climate related risks in the next five years if they do not build robust ESG frameworks on priority. As prevention, businesses should demonstrate climate resilience and strive to eliminate emissions to attract investors in the following ways.
Utilising resources optimally
Companies, big or small, should adopt the evolving ESG frameworks to satisfy compliance criteria. Environmentally responsible enterprises must focus on sustainable sourcing, resource allocation, and optimal utilisation of resources such as fuel, raw materials, air, and water. They should pay attention to waste management, scope emissions, water consumption, 3R practices, Extended Producer Responsibility (EPR), and Life Cycle Assessment (LCA) mandates.
Switching to renewable energy solutions
Best-in-class high-efficiency solar and wind energy products from leading manufacturers can deliver industry-leading energy efficiency of up to 98.8%. Cutting-edge power conversion and energy storage technologies integrate bi-directional battery devices, site controllers, inverters, and cloud-management systems to offer comprehensive energy storage for demand management, power dispatch, and renewable energy smoothing.
Addressing the missing link
SEBI’s mandates not only look at the firm’s relationships with internal and external stakeholders but also give an insight into how the company protects its workers’ wellbeing.
Thus, a firm’s social indicators should include employment opportunities, employee welfare, worker safety and training, human rights protection, social impact assessment, gender equality, and women empowerment. Similarly, corporate governance should involve anti-corruption and anti-bribery policies, conflict management, remuneration policies, employee retention, and stakeholder engagement strategies.
Streamlining people and processes
A PwC report identifies that the ESG agenda of companies comprises reporting, strategy-making, and business transformation. It predicts that senior executives will play vital roles in crafting strategy, driving performance, reporting results, and leading a company’s ESG transformation. Thus, companies should allocate competent professionals to source and analyse data, create bespoke datasets, and deploy ESG data tools to streamline processes, supply chains, and customers.
Avoiding ESG washing
Businesses should mine and record ESG-driven risks and opportunities and address transparency issues to avoid accidental ESG washing. Financial decision-making should involve data visibility, compliance with the global disclosures and data comparison to make ESG standardisation assessment easy for investors. Specifically, export sectors such as steel, iron, and cement have to set their net-zero targets to reduce their carbon footprint and stay globally competitive.
Final Say
Evidence-based storytelling of ESG-driven operations through audio, video, text, and social media establishes a company’s authenticity, strengthens stakeholder relationships, improves public perception, and enhances risk communication. Developing a 360-degree ESG architecture has become paramount in risk management, adaptation, accountability, and compliance from economic, social, and regulatory perspectives. Thus, India looks to integrate environmental and human health, collaboration and transparency, and transformation of various production modalities to realise its pledge of attaining net zero emissions in the future.
The interview was published in Times of India
