ESG: A Way Forward

Every business is deeply interconnected with issues relating to environmental, social, and governance areas. Environmental criteria address a company’s operations environmental impact and environmental stewardship. Social criteria refer to how a company manages relationships with and creates value for stakeholders. Governance criteria refer to the company’s leadership & management philosophy, practices, policies, internal controls, and shareholder rights.

ESG is often used interchangeably with corporate social responsibility (CSR) or corporate sustainability. However, ESG includes much more than CSR and sustainability. The 1980s witnessed the start of Environment-Health-Safety (EHS) which was based on the development of environment and employee regulations. A decade later 1990s saw the onset of practices of sustainability, mainly aimed at reducing environmental impacts and was beyond legal requirements. The era of 2000, witnessed corporate and employee participation and alignment towards environmental and social concerns. The year 2019 saw the emergence of ESG as a holistic concept encompassing risk management and safeguarding competitive advantage.   

It’s imperative that companies follow a clearly defined process and strategy to deal with the above concerns and proactively equip themselves with the right approach and mindset to deal with the same. ESG is used as a framework to assess how a company manages risks and opportunities that shifting market & non-market conditions create. ESG is about the ability to create & sustain long-term value in a rapidly changing world, and managing the risks & opportunities associated with these changes. ESG is a holistic approach and not just a fad or feel-good exercise. A weak ESG proposition implies a company losing its customers through weak sustainability processes (eg. human rights or supply chain) or perception of unsafe products. The company is exposed to the risk of losing access to resources, raw-material supplies, etc, as a result of poor community or labour relations. A strong ESG model, on the other hand, indicates, the strong brand image of the company to attract customers with more sustainable products; achieve better access to resources through better community and government relations.

 A strong environmental, social, and governance (ESG) proposition links to value creation in five essential ways.

1.      Revenue Growth

2.      Cost Reductions

3.      Regulatory and Legal Interventions

4.      Productivity Enhancements

5.      Capital Allocation

6.      Reputation and stakeholder trust

With the impact of Covid-19 causing unprecedented levels of disturbance in global supply chains, trade, and travel, it is now critical for businesses to have ESG in order to develop resilience. There are a few practices that businesses must develop to ensure long-term resilience.

1.      Have clear communication with relevant stakeholders with regard to risk management plans, contingency plans, involving employees and recognizing their contribution, involving government agencies, investors, creditors, about necessary developments, amendments, and other red flags if any.

2.      Prioritizing people safety: The COVID-19 has made it even more important, about the social aspect of incorporating ESG in the business and employee safety. To build resilience, organizations need to be flexible to ensure the health and well-being of employees.

3.      Have business continuity planning with suppliers for better inventory management and working capital management. Identify future risks with them, in order to avoid temporary disruptions in routine operations.

4.      Safeguard IT and information infrastructure by maintaining high data security, having regular maintenance and checks to enable the smooth running of business operations.

5.      Collaborate with the government in order to create a safe working environment and infrastructure by keeping track of notifications, instructions, and compliances.

Integrating ESG in enterprise risk management will improve the consistency and cohesiveness of sustainability-related risk management. This integration will help in decision-making and resource allocation, minimize the financial impact and improve stakeholder confidence. The trend of sustainable investing by incorporating environmental, social, and governance (ESG) factors is gaining traction in India. There are as many as 10 exclusive ESG-focussed funds (six were launched in FY21). Globally, the assets under the management of funds incorporating the ESG principle are more than USD 30 trillion. In that context, it is still in the infant stages for India, but there is clear visibility for ESG-focused investing to speed-up, on the back of regulatory thrust and favourable demographics. For companies too, ESG adoption has moved from being a risk-mitigating tool to a core strategic priority.

A preliminary paper by the World Bank dated February 2021 investigates the association between air pollution and Covid-19 in India, and estimates that a “1% increase in long-term exposure to particulate matter 2.5 leads to an increase in Covid-19 deaths by 5.7% points”. The urgent need to deal with climate change has never been felt before the COVID impact, thereby requiring collaborative work between government, society, industry, and regulatory bodies. Investors have started believing in the scope of physical risks that impact financial investments. Financial market regulator in India, Securities and Exchange Board of India (SEBI), has mandated that the Top 1,000 listed companies must publish an annual Business Responsibility and Sustainability Report (BRSR) on a voluntary basis in FY22 and then on a compulsory basis from FY23. This will drive material and sector-specific disclosures on a range of ESG metrics across industries. Experts have revealed that in India, there is first a need for voluntary disclosures on part of companies than mandatory disclosures.

Despite its increasing popularity and growth in the last few years, ESG investment is still unclear and controversial, which makes it hard to define what it means and what it does not mean. As investors, lenders, and other stakeholders, are becoming aware of the risks of not following sustainable practices, it is going to be extremely competitive for businesses to protect their fundamentals. ESG cannot be treated as one of the areas or subjects and needs to be a fundamental part of the overall corporate strategy and business model.