The ESG imperative

Outlast: How ESG can benefit your business

Author: Mukund Rajan, Rajeev Kumar

Publisher: Harper Business

Pages: 368

Price: Rs 799

Reams have already been written about the importance of responsible business, and why companies need not sacrifice profit for social outcomes, but the uniqueness of Outlast lies in the fact that it is the first Indian-authored book on how environment (E), social (S) and governance (G) can benefit businesses in the country. So, the problems and solutions are all set in the Indian context, and there are several case studies of Indian companies. This is useful for readers to relate to what the authors have advised.

The Tata group, of course, gets more than a pride of place in the book, which is understandable since both the authors spent much of their professional life there and were involved in the group’s remarkable ESG journey. That sense of belongingness and gratitude is evident throughout the book, which many readers may find a little repetitive.

Outlast successfully demolishes the shared wisdom of many Indian companies that their main responsibility is to generate profit for investors and a focus on ESG will mean sacrificing profits. The book shows that it’s not an either-or choice anymore, and companies can create both profit and social value. It explains how successful companies have embedded purpose into practice so that it’s more than just a mission statement.  

The need for businesses to shift their practices from wasteful extraction to sustainable, regenerative, equitable systems has never been greater. After the Covid-19 pandemic, many businesses now have a unique opportunity to prepare for a new age where businesses work for the good of society and make profit.

Such an approach makes good business sense, too, as organisations that have focused on improving their ESG performance have done better in terms of financial returns and have secured competitive advantages in product, labour, and capital markets. Poor ESG practices on the other hand have adversely affected shareholder value.

The authors have clearly delineated the ESG components: Environmental sustainability is demonstrated through optimal natural resource and energy consumption, responsible waste and pollution management leaving a minimal environmental footprint. The social dimension is determined by the links and ties the company creates with the local community, the concern for its employees and the working conditions, diversity and inclusion and factoring in the “long-term’’ well-being of other stakeholders, including suppliers, customers, and the community. The governance dimension brings together the role played by independent directors and board-effectiveness in ensuring transparency, stakeholder well-being through systems, processes, and audit controls.

As Outlast shows, the picture isn’t pretty as far as India Inc is concerned, though there are a few islands of excellence. One of the significant misses is spending on research and development (R&D). The national gross expenditure on R&D in science and technology as a percentage share of the Indian GDP has stayed stagnant at 0.6-0.7 per cent for the last two decades, compared to China’s 2.1 per cent of a far larger GDP and 2.8 per cent by the US.  On the second set of key drivers of ESG improvement in India are social issues, as represented by the “S” of ESG. Take gender diversity, for example. According to the World Bank’s India Development Report of 2017, India ranks 120th among 131 nations on female participation in the workforce.

Even in “G” (governance), the scope for improvement is huge. As the authors note, a cursory glance at the compensation of Indian corporate leaders in the Nifty-50 companies shows that they were paid, on an average, 260.5 times their organisation’s median employee salary. This needs serious introspection at a time when a K-shaped recovery is dominating the headlines. One of the valid suggestions in the book is to strengthen corporate boards with a dedicated ESG committee. But then in the sharp-elbowed world of business, a genuine effort at building green credentials also needs greater clarity and a compass. The book, therefore, encourages a code of conduct, clear compliance expectations and enforcement mechanisms. A “whistle blower” policy to flag-off deviations will enhance the execution.

The authors rightly argue that it would take a very brave and optimistic business leader in a developing country like India to count on technology transfer or financial support from the developed world for help in addressing climate change. Instead, prudence demands that business leaders with operations in developed markets make the investments, of their own volition, now secure and sustain their future.

The amount of research that has gone into the book is remarkable, evident from the fact that almost a fourth of the pages in the 368-page book contains a list of reference material — white papers, books, documents, surveys, newspaper articles. The list is useful for readers who want to go deeper into their understanding of ESG issues. The broad message that Outcast has successfully delivered is that ESG is not simply a burgeoning trend, and Indian corporate leaders must get on board or risk extinction.