ESG: A New Performance Measuring Tool in the hands of Investor

Guneet Mayall

December 14, 2023

ESG: A New Performance Measuring Tool in the hands of Investor

Environmental, Social, and Governance (“ESG”) is a set of qualitative and quantitative matrix used to assess the performance, risk, and stability of an organization both on financial and non- financial aspects.

In the recent years, inclusive growth for each and every stakeholder, adopting best governance practices, adapting to and mitigating climate change impact, and transitioning to a sustainable growth and economy have emerged as major global concern.

ESG analysis has become an increasingly important part of the investment process. Informed investors these days with an aim to achieve sustainable and responsible growth contemplates environmental, social, and governance issues as part of their investment analysis enabling them to gain a comprehensive 360° understanding of the companies in which they invest.

Global Perspective/ Regulatory Framework of ESG:

Sustainability reporting standards and frameworks have been developed to help countries enhance accountability, transparency and sustainability reporting. Following are certain important developments in the global regulatory landscape which imbibes the ESG reporting framework.

  • United Nations Guiding Principles on Business & Human Rights;
  • Global Reporting Initiative standard GRI-G4;
  • European Union’s Sustainable Finance Disclosure Regulation;
  • Standards issued by Sustainability Accounting Standard Board;
  • Task Force for Climate-related Financial Disclosures Recommendations;
  • Integrated Reporting Framework;
  • Climate Disclosure Standards Board Framework.

Indian Perspective/ Regulatory Framework of ESG:

Initiative by MCA

In 2011 the Ministry of Corporate Affairs (“MCA”) issued ‘National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business’ (“NVGs”) which encouraged reporting on environment, social and governance issues. Later, the National Guidelines on Responsible Business Conduct, 2018 (“NGRBCs”), were introduced which being an improvement over NVGs paved out ways for better ESG reporting comprising of nine pillars of business responsibility which are known as 9 Principles of NGRBCs. Business houses in India are urged to address these principles explicably. The 9 Principles are as follows:

Principle 1: Businesses should conduct and govern themselves with integrity and in a manner that is ethical, transparent, and accountable.

Principle 2: Businesses should provide goods and service in a manner that is sustainable and safe.

Principle 3: Businesses should respect and promote the well-being of all employees, including those in their value chains.

Principle 4: Businesses should respect the interests of and be responsive to all its stakeholders.

Principle 5: Businesses should respect and promote human rights.

Principle 6: Businesses should respect and make efforts to protect and restore the environment.

Principle 7:  Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent.

Principle 8:  Businesses should promote inclusive growth and equitable development.

Principle 9: Businesses should engage with and provide value to their consumers in a responsible manner. 

Initiative by SEBI

In 2015 the SecuritiesExchange Board of India (“SEBI”) aligned with then NVGs and considering the larger interest of public disclosure decided to address ESG reporting in Regulation 34(2)(f) of SEBI (Listing Obligation Disclosure Requirements) Regulations 2015 [“SEBI (LODR)”].

As per Regulation 34(2)(f) the ESG parameters were addressed by listed entities in Business Responsibility Reports (“BRR”) which forms part of the Annual Reports for listed entities. In May 2021, the erstwhile BRR was replaced by Business Responsibility and Sustainability Report (“BRSR”) which is accompanied with a guidance note to enable the companies to interpret the scope of disclosures including ESG, aligned with the nine principles of the NGBRCs. Reporting under each principle is divided into essential and leadership indicators. The essential indicators are required to be reported on a mandatory basis while the reporting of leadership indicators is on a voluntary basis. In addition to the essential indicators which require mandatory reporting, listed entities should endeavor to report the leadership indictors also. The standardized disclosures on ESG parameters under BRSR is intended to enable comparability across companies, industries, sectors and time.

The listed entities which are already preparing and disclosing sustainability reports based on internationally accepted reporting frameworks may give cross-reference of the disclosures made under such framework to the disclosures sought under the BRSR.

ESG and Investor:

Good governance, sustainable investment leading to sustainable growth and a wholistic impact analysis of business decision are not just buzzwords in today’s business world, in fact it has become a dire necessity and pressing priority. Today a vigilant investor seeks both financial as well as non-financial information to take a well-informed investment decision. There is an increased focus of investors and other stakeholders seeking businesses to be responsible and sustainable towards the environment and society. Investors these days have started using ESG as a tool while making investment decisions. Thus, reporting of company’s performance on sustainability grounds becomes as vital as reporting of company’s performance on financial and operational grounds. Responsible Business Conduct is a globally recognized concept founded on the idea of inclusive growth for everyone and foresee that the businesses can perform better when engaged actively in in adding value to the society, environment and various stakeholders from which they extract resources for production, human resource, finance for business, etc.

ESG factors can provide to the investors an insight into a company's governance and management practices, business model, vision, approach and overall sustainability, which has profound influence on the long-term financial prospects and shareholder returns.

Conclusion:

In most of the countries around the globe, ESG reporting requirements are voluntary and not mandatory. However, off lately investors principally wants ESG disclosures and reportings to consider the complete picture while analysing the investment risk associated with their decsion.

Through ESG, an investor is able to assess the company’s performance in areas which are beyond the traditional financial reporting of the companies making ESG as an eminent tool in the future of equity investing in India and the globe.

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