Shramona Sarkar , Guneet Mayall
September 30, 2024
A global phenomenon, "survival of the fittest," applies to both corporations and people. When others strive, make money, and finally flourish, only those that are most attuned to their dynamic ecosystem and cognizant of it survive. The Environmental, Social, and Governance (ESG) framework is a comprehensive tool that gives stakeholders insight into an organization's capacity to manage risks and seize opportunities for long-term, resilient, and sustainable corporate growth.
A combination of qualitative and quantitative elements, the ESG matrix assesses an entity's performance, stability, risk appetite, and risk mitigation from both a financial and non-financial perspective. The stakeholders can perform a thorough examination and obtain a 360° view of a commercial entity by using the multidisciplinary set of values and standards, which mainly encompasses environmental, social, and governance issues.
The emergence of ESG reporting can be traced back to 1997 when the Coalition for Environmentally Responsible Economies (“CERES”) and United Nations Environment Programme (“UNEP”) formulated the Global Reporting Initiative (“GRI”). GRI standards provide a framework for flexible ESG reporting with set standards and are presently most widely used standards for sustainability reporting which have been developed to aid countries across the globe to enhance the accountability, transparency and responsibility framework.
Ministry of Corporate Affairs (“MCA”) and Securities Exchange Board of India (“SEBI”) are the chief regulatory bodies in India who played an eminent role in introducing important developments in the regulatory landscape which imbibes the ESG reporting framework in India. Let’s divulge into the initiatives taken by the Indian regulators, chronologically.
In 2011 the MCA issued NVGs which encouraged reporting on environment, social and governance issues and to provide guidance to businesses on what constitutes responsible business conduct. NVGs were a means of nudging businesses to contribute towards wider development goals while seeking to maximize their profits.
In line with the NVGs, SEBI introduced BRR for listed entities in a phased out manner. In 2012, SEBI mandated BRR requirement for top 100 listed entities in their annual reports. The same was subsequently subsumed in 2015 under Regulation 34(2)(f) of SEBI (Listing Obligation Disclosure Requirements) Regulations (“SEBI (LODR)”), which was extended to 1000 listed entities considering the larger interest of public disclosure to address ESG reporting as a part of the annual reports for listed entities.
In order to align the NVGs with the global ESG practices the process of revision of NVGs was undertaken and were replaced by its successor NGRBCs paving out way for better ESG reporting comprising of nine pillars of business responsibility which were mapped against the United Nations Guiding Principles (“UNGP”) and Sustainable Development Goals (“SDGs”) popularly known as ‘9 Principles of NGRBCs’. NGRBCs intends to not just make companies more responsible and accountable but also to create a whole ecosystem to ‘Protect, ‘Respect & ‘Remedy’ as envisaged in the UNGPs. Business organizations in India were adjured to be watchful of these principles while carrying out their business activities and their day-to-day conduct.
In May 2021, SEBI amended the SEBI(LODR) and introduced new ESG parameters in the format of BRSR to replace the BRR. Reporting requirement under BRSR was initially voluntary for financial year 2021-22, however, from the financial year 2022-23, top 1000 listed companies (by market capitalization) were put under the mandate to publish the BRSR with their annual reports. The BRSR 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 indicators’ which are mandatory disclosures and ‘leadership indicators’ that an entity may choose to disclose voluntarily. Listed entities should make an effort to report the leadership indicators in addition to the key indicators, which are required to be reported. The goal of the BRSR's standardized disclosures on ESG parameters is to facilitate comparisons between businesses, sectors, industries, and eras. If the listed entities are presently producing and disseminating sustainability reports based on globally accepted reporting frameworks, they may cross-reference the disclosures made under those frameworks to the disclosures required under the BRSR.
Besides the aforesaid main regulations that governs ESG framework in India, the regulatory bodies in India have taken initiatives with respect to green debt securities, green finance and green deposits with the objective of cultivating and enhancing a green finance ecosystem in the country.
With the swiftly changing socio-economic and environmental factors all across the world, to entice greater investments, companies must strategize and contribute towards sustainable development of an economy. Further, investors are also increasingly making efforts to combine ESG components into their funding evaluation methodologies which allows them to maximize returns and limit threats during their investment cycle. In addition to the statutory ESG reporting requirements, the investors additionally consider numerous other elements that reflect a corporation's commitment to sustainability, responsible commercial enterprise practices, and adept value creation.
One of the key aspects that investors are usually interested in is carbon neutrality and net-zero emissions. Since ESG and carbon neutrality recognize the sustainability of the environment, investors have developed a widespread interest in an organization’s efforts to lessen their carbon footprint and attain carbon neutrality or net zero emissions. This entails imposing strategies to limit greenhouse gas emissions across operations and supply chains and offsetting the ultimate emissions by way of investing in renewable energy and green financing initiatives. Green financing tasks, along with renewable electricity initiatives, electricity-efficient infrastructure, sustainable agriculture, and green finance instruments have been unexpectedly receiving traction amongst the investment groups as they have widespread positive environmental effects.
Investors have also gained a keen interest in analysing transparency and accountability at the management level of a business enterprise. Companies that include transparency within their internal management governance along with unbiased representation are frequently viewed as having a higher approach in the direction of sustainability and accountable business practices. In addition to the above, companies that are involved in corporate social duty and philanthropic activities together with implementing welfare schemes are also seen as positively impacted by investors. ESG considerations undertaken by investors may also surpass the regular operations of an enterprise and evaluate the whole supply chain thereby assessing the environmental and socio-economic risks and influences at each level. Companies that divulge transparency in their supply chain control practices, such as ethical sourcing and labour requirements, and supplier diversity, are ethically regarded by investors. Investors might also check an organization’s efforts to initiate effect waste management policies, thereby incorporating minimum waste generation and effective disposal of the said waste, specifically plastic waste. Companies that prioritize waste reduction, recycling, and sustainable waste control practices are increasingly becoming appealing to investors.
Therefore, from an investor’s lens, ESG plays a sizable role in analysing a business enterprise’s profile before making investment-related choices. These aspects not only optimize the returns of the investment made by the investor but can also have a deeper impact on the social and environmental objects of an economy.
Presently, around the globe the ESG reporting requirements primarily are recommendary and voluntary in nature than 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.
ESG framework bestows to the investors to assess the company’s performance in areas which are beyond the traditional financial reporting making ESG as an eminent tool in the future of equity investing in India and the globe. With ESG reporting the stakeholders gets a discernment 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. It will be interesting to see how investors across the globe use this new weapon in their armoury to envisage their investment decision
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