India Inc becoming ESG-conscious
Environment Social and Governance (ESG) compliance has attracted the attention of business enterprise in the West for many years now. According to the US SIF Foundation, the year 2018 opened with a record of around $11.6 trillion assets in ESG-compliant investments. Though India too has many domestic asset management companies, thematic funds, and large private equity players drawn towards the ESG agenda, the fact is that its commitment to ESG norms is still in the nascent stage. f An analysis of this sunrise issue gains clarity from a preface of the criteria on which it is based.
ESG is a term used to evaluate the impact of an investment in a business/company in respect of its adherence to social, environmental, and governance standards. Here, social objectives refer to the quality of relationships with different stakeholders – whether employees, suppliers, customers, or the community at large. Environmental concerns imply the company’s carbon footprint: corporate policies and practices of energy usage, waste emission and management, pollution control, and treatment of animals are evaluated for their effectiveness in conservation of the natural environment of the company’s operations. The criteria can also be used in assessing any environmental risks the company might face and how it is managing those risks.
Governance markers focus on the quality and transparency of the company’s vision, mission, values and leadership, management styles, compensation structures, and protection of shareholder interests. These include an appraisal of the company’s accounting methods for their accuracy and fairness, as also the study of other practices to detect or rule out the possibility of conflicts of interest, political influence, and illegal transactions.
The aim of determining compliance to the three metrics is to enable ESG-conscious investors better evaluate the investing options before them, thereby mitigating the risks of investing in value props that tend to compromise ESG concerns.
More often than not, these risks turn lethal in the medium to long term.
The latest McKinsey Survey on assessing ESG programs offers rich insights into the critical ESG norms and their perceived long-term benefits. The survey has strengthened the unanimity among investors and executives to raise ESG standards and create user-friendly, effective metrics and data standards.
Globally, executives and investment professionals take ESG issues into consideration for strategic and operational decision-making. They largely acknowledge that ESG compliance affects company performance, and that the financial impact of ESG programs makes a dent in the growing expectations and scrutiny from stakeholders.
The way forward for India Inc
It is imperative that India actively promote a strong ESG culture to ensure the country’s global competitiveness going forward. This needs a new framework that urges its members to think radically and act rapidly, dutifully moving away from the somewhat mediocre and even flawed practices of the past.
This crusade could begin with business regulators (such as the Ministry of Corporate Affairs and SEBI) shunning the current ‘punitive regime’, which subscribes to the negative language of reprimands, reversals, penalties, and punishments. Secondly, the regulatory regime needs to be discernibly inclusive, uncomplicated, and transparent to ensure that organizations consciously take corrective action on ESG compliance without harsh reprimands and imposition of any cumbersome ‘compounding’. At the same time, managements across companies will have to show a long-term, earnest, and sincere commitment to the ESG agenda and, consequently, strive to build robust and ethical business practices. This is easier said than done, but certainly feasible.
Notwithstanding India’s improved ranking on the Ease-of-Doing-Business index, its business transactions are still governed by a rigid system, replete with cross-functional regulations and complications, which refuses to acknowledge its inherent weaknesses and susceptibilities. Small wonder that almost every practicing entity within the system detests any interface with the regulators, invariably assuming it to be burdensome and castigatory. It is therefore vital that a more meaningful dialogue on the myths and realities of ESG requirements be encouraged between government regulators, audit agencies, corporate players, investment firms, industry experts, and academic scholars. Ideally, the fervour of the investing world should equal the force of regulation, urging companies towards a transition that favours ESG compliance. This, as already stated, needs a more favourable business climate where interactions are driven by the pull of faith, not the push of fear.
Ultimately, all systemic stakeholders will realize that complying with environmental, social, and governance criteria is not a mere ethical concern, as the risk factors are more lethal and even fatal. Worldwide, records of seemingly non-financial impact of environmental, social, and governance debacles have invariably translated into huge financial losses, tumbling stock prices and, more importantly, irreparable damage to the corporate reputation.
The latest McKinsey Survey on assessing ESG programs offers rich insights into the critical ESG norms and their perceived long-term benefits. The survey has strengthened the unanimity among investors and executives to raise ESG standards and create user-friendly, effective metrics and data standards.
Globally, executives and investment professionals take ESG issues into consideration for strategic and operational decision-making. They largely acknowledge that ESG compliance affects company performance, and that the financial impact of ESG programs makes a dent in the growing expectations and scrutiny from stakeholders.
The way forward for India Inc
It is imperative that India actively promote a strong ESG culture to ensure the country’s global competitiveness going forward. This needs a new framework that urges its members to think radically and act rapidly, dutifully moving away from the somewhat mediocre and even flawed practices of the past.
This crusade could begin with business regulators (such as the Ministry of Corporate Affairs and SEBI) shunning the current ‘punitive regime’, which subscribes to the negative language of reprimands, reversals, penalties, and punishments. Secondly, the regulatory regime needs to be discernibly inclusive, uncomplicated, and transparent to ensure that organizations consciously take corrective action on ESG compliance without harsh reprimands and imposition of any cumbersome ‘compounding’. At the same time, managements across companies will have to show a long-term, earnest, and sincere commitment to the ESG agenda and, consequently, strive to build robust and ethical business practices. This is easier said than done, but certainly feasible.
Notwithstanding India’s improved ranking on the Ease-of-Doing-Business index, its business transactions are still governed by a rigid system, replete with cross-functional regulations and complications, which refuses to acknowledge its inherent weaknesses and susceptibilities. Small wonder that almost every practicing entity within the system detests any interface with the regulators, invariably assuming it to be burdensome and castigatory. It is therefore vital that a more meaningful dialogue on the myths and realities of ESG requirements be encouraged between government regulators, audit agencies, corporate players, investment firms, industry experts, and academic scholars. Ideally, the fervour of the investing world should equal the force of regulation, urging companies towards a transition that favours ESG compliance. This, as already stated, needs a more favourable business climate where interactions are driven by the pull of faith, not the push of fear.
Ultimately, all systemic stakeholders will realize that complying with environmental, social, and governance criteria is not a mere ethical concern, as the risk factors are more lethal and even fatal. Worldwide, records of seemingly non-financial impact of environmental, social, and governance debacles have invariably translated into huge financial losses, tumbling stock prices and, more importantly, irreparable damage to the corporate reputation.
