The Environment, Social & Governance (ESG) agenda has been steadily navigating its way in the 21st century and gaining significant traction from organizations and their stakeholders. The recent wave of global regulations, enforcement, increased awareness and expectations, and emphasis on maintaining stakeholder trust and reputation is driving organizations to adopt a more integrated approach for their ESG goals.
The ESG issues continue to evolve as strategic business imperatives. The pandemic has highlighted the importance of sustainable and resilient business models to support the economic recovery strategies of companies, along with insightful reporting to provide stakeholders with a clear understanding of those models, when making informed investments and taking other related decisions. Investor expectations on such disclosures are rapidly evolving, and companies are carefully navigating these expectations, including the related need for robust internal controls around data collection, as well as the content and presentation of sustainable information that they publish.
ESG metrics hold the following concerns in high esteem:
Environmental concerns: waste management, usage of renewable energy, and other precautionary measures in order to minimize their impact on the environment.
Social concerns: Corporate Social Responsibility, healthy employer-employee relationships, how the company pays back its employees as well as the community outside of its primary group of activities.
Governance-related concerns: accountability and transparency in the activities carried out by the company. The ESG Funds invest in ‘Mutual Funds’ or ‘Companies’, following the environmental, social, and governance (ESG) criteria. Investment approaches to ESG also include activist hedge funds, focus funds, and relational funds. In India, ESG investments offer tax benefits to the investors, under section 80G of the Income Tax Act. These companies have a lower risk of facing regulatory issues and punishments related to environmental damage, governance, or management integrity.
ESG funds have attracted record inflows during the pandemic. A greater focus on ESG typically yields higher resource-use efficiency, lower cost of operations, reduced risk, stronger employee engagement, lower cost of borrowing, and increased analyst coverage and investor interest.
Investors too are placing their bets on companies with high environmental, social, and governance scores. India already has about 23 ESG funds, and assets add to Rs 12,000 crore by the end of June 2021. Globally, there would be almost 50 trillion dollars focused on ESG investing by 2025.
The role of ESG in tackling environmental, social, and business Issues can be noted in the landmark judgment, of May 26, 2021. A Dutch court ordered Royal Dutch Shell and the Group companies to significantly deepen planned greenhouse gas emission cuts. The company was ordered to cut the carbon-dioxide emissions by a net 45% by the end of 2030, compared to the level of emissions in the year 2019. The verdict was an aftermath of the petition, filed by a group of environmental NGOs.
In March 2019, the Ministry of Corporate Affairs revised the NVGs on the social, environmental, and economic responsibilities of business, and released the ‘National Guidelines on Responsible Business Conduct’ (NGRBC). These principles urge businesses to actualize the principles in letter and spirit. The listing regulations of SEBI have added new reporting requirements on ESG parameters called the ‘Business Responsibility and Sustainability Report’ (BRSR). It has mandated 1,000 largest listed companies to report annual sustainability progress, through BRSR. The BRSR seeks disclosures from listed entities on their performance, against each of the nine principles of the ‘National Guidelines.
The BRSR is intended towards having quantitative and standardized disclosures on ESG parameters to enable comparability across companies, sectors, and time. Such disclosures will be helpful for investors to make better investment decisions. The BRSR shall enable companies to engage more meaningfully with their stakeholders, by encouraging them to look beyond financials and towards social and environmental impacts.