Hear the drumbeat, it is green

From the PM, to regulators, to those setting global standards, to investors, to the communities companies operate in, to the millennials who will be their future customers, the drumbeat is changing

India, more specifically corporate India, is slowly being made to march to the drumbeat of the Paris Agreement — it just does not know this. The most recent pointer was at the virtual climate summit, where the prime minister reaffirmed India’s commitment to achieving the goal of keeping global warming well below 2˚C. In fact, he indicated that India will exceed its commitments.

Before this, the prime minister at a virtual Investors Roundtable on November 5 had said: “Today, investors are moving towards companies which have a high environmental, social and governance score. India already has systems and companies which rank high on this. India believes in following the path of growth with equal focus on ESG.”

The prime ministers’ statements apart, there has been a steady stream of announcements that have largely gone unnoticed.

Between his two statements, the central government had issued a gazette notification on November 27, setting up an apex committee with 17 members chaired by the Ministry of Environment, Forest and Climate Change.

While these might be high-level national commitments, beyond a corporate board’s agenda, both the Ministry of Corporate Affairs and the Securities and Exchange Board of India (Sebi) have corralled in the corporate sector. They first did so almost a decade ago, way back in 2011, through the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs) — in line with the UN Global Compact, which saw governments and the private sector walking in lockstep to achieve the millennium and sustainable development goals. The NVG has nine broad principles to be adopted by companies as part of their business practices.

If these are the “principles” that companies must adhere to, what should the disclosures be? So soon after, in 2012, Sebi introduced Business Responsibility Reporting (BRR) guidelines based on these NVG’s. The BRR reporting was made mandatory for top 500 listed companies.

Fast forward to 2019, the NVG structure was revised and replaced by the National Guidelines on Responsible Business Conduct (NGRBC). This refresh was needed because the UN’s Sustainable Development Goals (SDG’s) had quickly become a part of the global lexicon and by now the Paris Climate Accord was in the equation too. And at home, we had the new Companies Act, 2013. Even as the principles remain broadly the same, the NGRBC now articulates core elements for each principle that are essential to the actualisation of the principles, with an essential or mandatory element and a voluntary or leadership element. The BRR reporting was extended from 500 to 1,000 companies, and critically, put the responsibility on the board for adoption of the principles.

Sebi pretty much replicated this document this August, while seeking public feedback on the revised BRR disclosures by companies. Separately, in another discussion paper in November on risk committees of boards, Sebi asked them to start looking specifically at ESG-related risks. Even as companies report based on what Sebi finalises, this will not be the final word. This will be written, over the next few months, when a call will be taken whether there will be one global standard for reporting on climate risks or there will be competing standards. Michael Bloomberg has been at the forefront on this, serving as Chair of the Sustainability Accounting Standards Board, the Task Force on Climate-Related Financial Disclosures standards. And as he argues, “climate risk data — like any kind of financial data — is only useful to investors if they can compare it across companies on an apples-to-apples basis. If the data isn’t consistent and comparable, it’s not very helpful.”

Finally, the global money chasing ESG-related themes. There is no one authentic source, but various estimates put this at around $50 trillion — albeit based on a broader classification. It is set to double in two years. Those who believe that this is a global phenomenon and nothing to do with India, need to look at our fund management space: Six fund houses have ESG funds, with four launches in 2020 itself.

Company boards and managements have been delivering a jeremiad, lambasting regulators for asking them for too much data and disclosures. To most, meeting the 2˚C target is equivalent of asking them to boil the ocean: The CSR spend is their badge of good corporate citizenship. They are now asking, “What does this do to my financial performance?” For investors, sifting through data and understanding the taxonomy is the equivalent of the bucket challenge: It is the current rage, so I am doing it, but will it deliver alpha? The pluses and minuses are the subject of another conversation. But corporate India should make no mistake. From the prime minister, to the regulators, to those setting global standards, to investors, to the communities companies operate in, to the millennials who will be their future customers, the drumbeat is changing. They should hear it, and it is green. Technology and regulations may mean one step backward for two steps forward or maybe no movement at all, but it is this groundswell corporations will now need to march to. 

The writer is with Institutional Investor Advisory Services. Views are personal. @AmitTandon_in