ESG Buzz Word or Real Need of Times

For Corporates, ESG Is a Transformational Journey, Which Is to Be Traversed at The Earliest and Is No Longer Just a Buzzword

Today in all board rooms and corporate discussions, one of the most common topics is Environmental, social and governance (ESG) and its impact on the requirement gathering and measurability aspect for the purpose of reporting and disclosures under the Business Responsibility and Sustainability Report (BRSR). Even for the companies where BRTR is not mandatory, are voluntarily gathering the required data for reporting and disclosures under the BRSR. This leads us to the main question on the impact and importance of ESG.

The ethics of responsible business is based on the principle of business being accountable to all its stakeholders i.e. employees, community, and the environment. In India, ESG was first embedded in the form of voluntary guidelines in the year 2011 and later incorporated in the Companies Act, 2013.In keeping with global developments, these voluntary guidelines were upgraded and updated further in the year 2019. Initially, the market regulator in India i.e. Securities and Exchange Board of India [SEBI] has mandated top 500 listed companies by market capitalization to make disclosures on business responsibility and sustainability indicators contained in the Government’s voluntary guidelines since 2012 through Business Responsibility Reporting (BRRs). However, on May 10, 2021, SEBI introduced BRSR and mandated that the top 1000 listed entities report their sustainability performance in order to maintain transparency with stakeholders as a part of their annual reports and also the report goes to the stock exchange (s) where the company’s securities are listed.

Reporting and Disclosure Framework under BRSR:

I. Section A: General Disclosures - Details of the listed entity; Products/services; Operations; Employees; Holding, Subsidiary and Associate Companies (including joint ventures); CSR Details; Transparency and Disclosures Compliances.

II. Section B: Management and Process Disclosures- This section is aimed at helping businesses demonstrate the structures, policies, and processes put in place towards adopting the (National Guidelines on Responsible Business Conduct) NGRBC Principles and Core Elements.

III. Section C: Principle Wise Performance Disclosures- This section is aimed at helping entities demonstrate their performance in integrating the Principles and Core Elements with key processes and decisions. The information sought is categorized as “Essential” and “Leadership”.

• Principle 1: Businesses should conduct and govern themselves with integrity and in a manner that is ethical, transparent and accountable.

• Principle 2: Businesses should provide goods and services in a manner that is sustainable and safe. This principle encourages businesses to understand every material sustainability issue across their product life cycle and value chain.

• Principle 3: Businesses should respect and promote the well-being of all employees, including those in their value chains. This principle identifies the well-being of an employee and the welfare of his/ her family.

• Principle 4: Businesses should respect the interests of and be responsive to all its stakeholders. This principle brings into light that businesses have a responsibility to maximize the positive effects and minimize and mitigate the negative impacts of the products, operations and practices on their stakeholders.

• Principle 5: Businesses should respect and promote human rights. This principle is inspired, informed and guided by the Constitution of India and the International Bill of Rights and recognizes the primacy of the State’s duty to protect and fulfil human rights.

• Principle 6: Businesses should respect and make efforts to protect and restore the environment. This principle gives preference to environmental issues that are interconnected at the local, regional and global levels of doing businesses to address the problems like pollution, biodiversity conservation, sustainable use of natural resources and climate change in a comprehensive and systematic manner.

• Principle 7: Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent. This principle recognizes the legitimacy of businesses to engage with governments for redressal of a grievance or for influencing public policy.

• Principle 8: Businesses should promote inclusive growth and equitable development. This principle mentions the need for collaboration amongst businesses, Government agencies and civil society in this development agenda.

• Principle 9: Businesses should engage with and provide value to their consumers in a responsible manner.

While, there is no exhaustive list of parameters and standards of disclosing the ESG criteria, there are certain common factors which are universally applied while determining the ESG metrics adopted by the organization:

Environmental: The BRSR has placed significant thrust on environmental compliances by mandating many quantitative and qualitative disclosures with respect to energy consumption, water withdrawal, air emissions (including for greenhouse gas emissions), waste management, sustainable sourcing thereby adhering to Principles 2 and 6. The company may have the following environmental factors as part of ESG:

• Avoid using plastic bottles as much as possible;

• Switch off the lights when going on breaks, lunch etc. and use the energy more efficiently;

• Using the renewable energies which emit less greenhouse gas instead of traditional modes of generating energy Proper waste management;

• Proper water management by installing automatic sensor taps in all washrooms to save water;

• Recycle papers;

• Grow Trees campaigns;

• Efficient recycle of e-Waste;

• Digital processing of Invoices/ vouchers to save papers.

• Storing contracts in electronic repository which sustainably minimizes the printing of documents.

• Replacing the lights with LEDs at all locations.

• Motion Sensor lights & AC vents in meeting rooms/washrooms & cabins in all locations.

• Switching off all the computer systems when not in use.

• Optimized air conditioners with regular servicing.

• Use of Daylight wherever possible in offices.

• Implementation of environmentally friendly policies such as no deforestation or encouraging animal welfare;

• True and complete disclosure about the environmental policies.

Social: These disclosures are intended to persuade compliance with Principles 3, 4, 5, 8 and 9 as stated above. The following factors are the social indicators which helps in determining the company’s role in the development of society.

• Implementation of gender neutral and no discrimination policies;

• Providing safe and hygienic working conditions for employees;

• Formulating labor standards to ensure fair wages and protection of human rights;

• Development of good relationship with the local communities;

• Providing customer satisfaction;

• Protection of data and respecting the privacy of the personnel;

• Resolution of conflict between the organization and personnel harmoniously;

• Prioritizing the health and safety of employees.

Governance: This criterion focuses upon the corporate policies and standards for governing and running of organizations. Corporate governance is a long-term strategy, and it may include the following indicators which will be in accordance with Principles 1 and 7 as stated above:

• Tax saving strategy;

• Board composition and independence;

• Committee structure;

• Anti-Corruption and Anti Bribery policies;

• Protecting the interests of shareholders;

• Policies on donations and political contribution;

• Lobbying;

• Risk Management;

• Compensation to executives;

• Whistleblower scheme;

• True and fair disclosure of abovementioned indicators

The corporates in India, who are dealing with perceptions of stakeholders on the ESG compliant company and the herculean reporting and disclosure requirements in terms of collection of data which is measurable are finding it an uphill task. To add to their worries is the pressure on margins and the substantial advisory and implementation cost of ESG. Some of the common challenges are: (i) challenges relating to the transition process; (ii) newer companies have less experience in managing and reporting on business sustainability; (iii) the format for BRSR is restrictive in nature as it does not seek sector-specific information in its reporting; (iv) several companies are choosing to differentiate between voluntary disclosures and mandatory disclosures and prefer disclosures that are called for mandatorily; (v) reporting requirements are very comprehensive and time consuming. (vi) key officers are debating whether to focus on business growth and margins or to spend significant time on ESG committee meetings, collating the reporting and disclosure requirements etc. (vii) advisory on ESG is expensive for mid-level companies.

While, change is the only constant in life, it is important to understand that early adoption of ESG “Regulatory Wise” practices will be critical for businesses. The cost of climate inaction is way higher than the actions required to mitigate the risks. The current world that has experienced the pandemic scenario with COVID-19 virus, has observed that those organizations which have had strong foundation with ESG strategy were resilient and agile to adapt to the risks and protect the interest of all concerned stakeholders. ESG ratings creates right awareness and perceptions about the governance and conduct of the companies and impact the profitability. Moreover, having a robust ESG dashboard on the website and communicating the same to all stakeholders is assuming great significance, as it enhances stakeholder relationships and public perception. In India, many companies that are not required to follow the ESG criteria set by the regulators are voluntarily and pro-actively making compliances and using such communication to talk about their future business strategy. For corporates, ESG is a transformational journey, which is to be traversed at the earliest and is no more a buzz word.

References: 

1. SEBI Circular No.: SEBI/HO/CFD/CMD-2/P/CIR/2021/ 562 on “Business Responsibility and Sustainability Reporting by listed entities” dated May 10, 2021.

2. National Guidelines on Responsible Business Conduct issued by the Ministry of Corporate Affairs.

3. PwC Report on ESG Reporting.

4. Newspapers – News articles on ESG Governance.

5. ESG Reporting Guide – Nasdaq.

6. EY – ESG Reporting Evolution article.

7. ESG Article on Mondaq platform.

8. Harvard Law School Forum on Corporate Governance (Nov 05, 2021).

9. Matthew Bell, Why ESG performance is growing in importance for investors.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.