Companies need to adapt to the ever-evolving framework of ESG to make sure that the criteria are consistently and adequately met
With spotlight on measures taken by businesses to safeguard the environment, the implications of covering the environmental, social and governance (ESG) criteria are being acknowledged by them, their investors and even regulators. ESG, used interchangeably with sustainability, is about pursuing responsible and ethical business practices with attention to social and environmental equity along with economic development. It is about measuring sustainability based on quantitative or semi-quantitative data.
In India, when we talk about sustainability, there have been two watershed moments—Corporate Social Responsibility (CSR) reporting and spending, the first such initiative globally, being made mandatory under the Companies Act, 2013; and the Securities and Exchange Board of India (SEBI) making the Business Responsibility and Sustainability Report (BRSR) mandatory for the top 1,000 listed companies by market capitalisation.
The BRSR, which came into effect on April 1 this year, is expected to lead to the development of a business responsibility sustainability index for companies in the country’s work-in-progress ESG framework. Namita Vikas, the founder and managing director of advisory firm auctusESG, says, “The BRSR is a big starting point as it mandates disclosures on material ESG risks and opportunities and their financial implications and risk management.”
India’s steps towards building a strong ESG framework is in line with developments in other parts of the world. The European Union, for instance, has asked industry and financial institutions to factor in ESG in decision-making and disclosures. Countries like the UK and New Zealand have already transitioned from voluntary to mandatory climate-related financial disclosures.
While the ever-evolving ESG regimes vary across countries, regulators and sectors, there are five specific guiding principles—ones that are expected to remain constant—that could help companies ace their ESG game:
Go Beyond Environment
For the most part, businesses have been asked to focus on environmental sustainability. Environmentally responsible businesses have been working towards sustainable sourcing, allocation and utilisation of resources, like fuel, raw material and even air and water with consideration for waste management. The primary objective of businesses may not be to protect the planet, but responsible businesses have been trying to avoid degrading it.
While environmental sustainability will continue to be a priority area of action, businesses will also have to focus on social and governance issues. Evolving ESG regimes are now making social indicators important, too.
Inderjeet Singh, partner, financial advisory, Deloitte India, says, “The requirements of diversity, equity and inclusion, which tend to be treated as more of an inbound activity, should ideally be extended to the society when CSR investments are undertaken.” When it comes to governance, transparent and ethical behaviours are demanded. “Proactive accountability should be beyond just a tick in the box,” adds Singh.
Develop Tools for ESG Data Management
It is important to source and analyse data and create customisable datasets about processes, supply chains and customers. Such datasets will come handy not only in responding to multiple regulators and investors but also to customers and the society at large.
They can be also used to mine and record material risks. IPOs, too, require disclosure of risks and their impacts. Some companies are already feeding positive data into strategic communication for business edge. Easy availability of authentic data also helps in avoiding accidental ESG-washing—providing misleading information about the company’s impact.
ESG data tools are necessary for ESG-ready companies, says auctusESG’s Vikas. “Currently, disclosures serve as the primary source of ESG information but, going forward, robust databases would be useful to identify data-driven ESG risks and opportunities, and curb transparency issues,” she adds.
A central and common database is particularly useful because a lot of the same data is required for different compliances. The BRSR, for instance, allows cross-reference of disclosures made by companies under international frameworks, like the Global Reporting Initiative, Sustainability Accounting Standards Board, Task Force on Climate-related Financial Disclosures, International Sustainability Standards Board and International Integrated Reporting Council, which are also increasingly working in tandem. For example, the International Sustainability Standards Board is working with the Global Reporting Initiative to set ESG-related standards.
Prepare for ESG Reporting
Rather than being sensitive about sharing data required by key stakeholders, the demand of the times is to be transparent. Sustainable finance taxonomies in countries across the globe are emphasising improvement in transparency around financial decision-making.
In compliance with the Task Force on Climate-related Financial Disclosures, companies worldwide have started making disclosures. Deloitte’s Singh says, “Businesses now understand the risks and opportunities presented by climate change and the importance of being future-ready.”
SEBI’s guidelines on ESG rating are likely to usher in an era of standardisation of ESG risk assessment which would come particularly handy for investors and make comparable data available. In May 2021, the Reserve Bank of India established a Sustainable Finance Group to formulate the ESG lending rules which are set to impact borrowers.
Measure and Manage Emissions
Climate-related risks can cause Indian companies a Rs 7,138-billion loss and they stand to gain Rs 2,787 billion, said a 2020 Carbon Disclosure Project report titled Building Back Greener: India Inc. Demonstrates Climate Resilience. Eliminating or reducing emissions is the defining demand of our times. The sooner the companies do it, the better it is for them and the planet. There is an established business case for net-zero emissions also set against the backdrop of Prime Minister Narendra Modi setting India’s net-zero emission target for 2070 at the United Nations Climate Change Conference in Glasgow last year.
Scores of Indian companies have set net-zero targets or are committed to reduce their emissions. To stay globally competitive, Indian companies, particularly exporters in sectors like iron, steel and cement, need to go beyond mapping their carbon dioxide pathways and take action.
Namrata Rana, director of consultancy firm Futurescape, says, “Since investors recognise that the cost of climate inaction is way higher than the actions required to mitigate the risks, a concerted effort is being made to drill down the ESG metrics across geographies and sectors.’’
Use ESG Communication for Business Edge
Recording evidence of ESG behaviour for investors and others does not need to be overemphasised. Evidences are appetisers for investors to deep dive into datasets. Storytelling through text, audio, video, multimedia or social media with evidence based on authentic datasets creates lasting memories of the ESG impact of the services or products of a company. These are value additions to the compliance check-box data.
Apart from attracting investors, external communication also assumes significance as it enhances stakeholder relationships and public perception, and can prove to be useful in risk communication. Even companies that are not required to follow the ESG criteria set by the regulators can use such communication to talk about their future business strategy.
The ESG regime is heading towards standardisation, which would reduce the scope of misrepresentation, greenwashing and mixed messaging from heterogeneous classification. Investors are also likely to narrow down their preferences. In such a scenario, companies need to be proactive and setting targets and issuing statements of intent will not be enough.
Companies need to address the implications of regulatory and socio-economic change, says Vikas. “It has become paramount to develop an ESG architecture by assuming a 360-degree approach which not only covers risk mitigation, adaptation and accountability frameworks but also enhances opportunities from a long-term perspective,” she adds.
Keeping track of three connected areas—planetary and human health, collaboration and open data, and modernising various production systems—are necessary, says Futurescape’s Rana, adding that they call for action which must be pursued globally—simultaneously and with determination.
CDP (formerly Carbon Disclosure Project): Its annual questionnaires seek standardised environmental disclosure on any or all three areas of climate change, water and forest. The questionnaires are backed by institutional investors known as CDP signatories.
Global Reporting Initiative: Its set of 34 topic-specific standards, set from the points of view of investors and other stakeholders, is the world’s first-ever set of sustainability standards which focuses on economic, environmental, social and governance performance and the impact of material issues.
International Integrated Reporting Council: Its reporting framework uses a comparable format to enhance the quality of information for strategy, governance, performance and prospects of a company for the benefit of providers of financial capital.
Sustainability Accounting Standards Board: It focuses on communication of sustainability actions on material sustainability keeping in mind 77 different industry-specific standards developed with the help of an evidence-based and market-informed process.
Task Force on Climate-related Financial Disclosures: It enables companies to identify and disclose climate-related financial risks and opportunities primarily to investors, lenders and insurers.
United Nations Global Compact: The Compact, with its chapters in 80 countries, encourages public reporting of annual communication on progress on its 10 principles related to human rights, labour, environment and corruption.