 "ESG")
As Environment Social and Governance (ESG) evolve around the world, companies across sectors are being pushed towards greater responsibility and transparency. In India, while ESG is still in its early days, it is gaining momentum. As this momentum increases, it is anticipated that the ESG landscape will become more complicated, with companies being assessed on a variety of factors, from employee well-being to the effects of climate change and biodiversity.
What is ESG?
Environmental, Social, and Governance or ESG is a framework that is used to assess the business practices and performance of an organisation on sustainability and ethical issues. The term ESG became popular in 2004 by "Who Cares Wins" after a report was published by a group of 18 banks and investment firms that were recognised by the United Nations.
ESG programme helps the stakeholders to understand how an organisation is managing risks as well as opportunities related to ESG criteria or ESG factors.
Role of ESG programme?
According to a report by TechTarget, while sustainability and corporate governance are usually considered non-financial performance indicators, the role of an ESG programme is to ascertain accountability along with the implementation of the systems to manage the impact of an organisation. For instance, how it treats its employees, stakeholders, and suppliers and its carbon footprints.
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ESG Criteria
Every aspect of ESG plays a crucial role in the effort to increase the focus of an organisation on ethical and sustainable practices. Some common ESG criteria that are used by investors and companies are:
Environmental-Energy consumption and efficiency
Social- Fair pay for employees, including a living wage
Governance- Company leadership and management
CSR Vs ESG
While CSR refers to the organisation's policies, values, and practices that address social and environmental issues, ESG is an umbrella term, used primarily by investors to assess an organisation's impact on society.
ESG funds and recent Sebi guidelines
According to Sambitosh Mohapatra, ESG Leader, PwC India, the Securities Exchange Board of India (Sebi) has mandated the Top-1000 listed companies by market capitalisation to report their ESG data as per the requirements of the Business Responsibility and Sustainability Reporting (BRSR) starting from FY 2023.
"The BRSR seeks disclosures on specific key performance indicators against the nine thematic principles and guidelines of the National Guidelines on Responsible Business Conduct (NGRBC)," he said.
According to a recent CNBC TV report, the market regulator Sebi announced a few measures with the intention of boosting ESG-based investing in India via mutual funds. Sebi has also mandated asset management companies (AMCs) to provide disclosures on votes cast on resolutions of ESG issues. This move by Sebi is also favourable for the investor community that is keen to invest in green, sustainable, and impact funds.
Status of ESG implementation in India
While talking about the status of ESG implementation in India, Nawneet Vibhaw, Partner, Shardul Amarchand Mangaldas & Co said, "The last financial year (2022-23) was the first year for mandatory ESG reporting by the top 1,000 companies in India. It may still sound like a nascent stage for ESG implementation in India but the reality is that in this short span of 2-3 years, the regulator(s) have done a phenomenal job to ensure its effective implementation."
He further said that the regulators have been quick to identify some of the loopholes and are taking well-thought steps to plug them at the earliest.
"Sufficient awareness has been created regarding ESG reporting and its importance for various stakeholders and not just the top 1,000 companies but even those beyond are working sincerely to ensure that they are compliant on all relevant parameters and even exceed the regulatory and investor expectations," he added.
Is ESG here to stay? Fear of 'Greenwashing'
According to Mohapatra, "The primary reason for ESG to stay is the strengthened scientific evidence for unsustainable consumption and its impact on the economic and financial systems. Emerging ESG risks such as climate change, biodiversity, water, waste, and human rights do have a negative impact on the society and economy."
Mohapatra further said, "Governments, regulatory authorities, capital markets, and corporates are adopting measures to mitigate these risks and leverage opportunities. Thus ESG has become a hallmark of a responsible brand with which investors find meaning and consumers a reason to be associated with. ESG has now become outcome-oriented since it has a direct impact on valuations, brand goodwill, license to operate, capital access, and capital allocation in the market."
'Consumer behaviour is another critical driver for ESG as consumers have begun to reward corporates who are championing the cause of sustainability. Additionally, increasing the flow of funds towards ESG-specific investments is accelerating the integration of ESG goals into corporate strategy, portfolio allocation, and investment decisions," said Mohapatra.
However, experts have also highlighted the criticism around ESG which includes 'greenwashing' and using misleading environmental claims to entice well-meaning customers.
Greenwashing is a marketing technique that companies use to lure in environmentally conscious customers. Greenwashing takes place when businesses represent themselves as sustainable by giving out false or misleading information.
According to a Forbes report, "Greenwashing has become a big problem for ESG. Studies have shown that more and more ESG funds include companies that are far from being paragons of social and environmental responsibility."
Challenges faced by companies during ESG implementation
Monish G. Chatrath, Managing Partner, MGC Global Risk Advisory LLP. listed out some of the challenges that companies face during the implementation of ESG. "Limited awareness, inadequate resources to integrate ESG considerations into business practices, varying data, and emerging regulations with guidelines are some challenges being faced by organisations today," he said.
