Environmental Social Governance Investing - A Premier

 

For the past few months, there is a lot of Hype About ESG Investing. So, Let's Take a Deep Dive by understanding what it is? ESG stands for Environmental, Social, Governance. Now, let’s understand the concept of ESG Investing one by one.

Environmental criteria address a company’s operations environmental impact, Environment and environmental stewardship.

Social criteria refer to how a company manages relationships with and creates value for stakeholders.

Governance criteria refer to a company’s leadership & management philosophy, practices, policies, internal controls, and shareholder rights.

 

KEY TAKEAWAY

ESG is about the ability to create & sustain long-term value in a rapidly changing world, and managing the risks & opportunities associated with these changes.

There is no universal categorization for ESG issues, and some can be defined in different ways depending on the industry, company characteristics, and the business model.

Now that being said, What Does it Mean for India Inc.?

 

SEBI's Business Responsibility and Sustainability Reporting (BRSR) is proposed to be applicable for top-1,000 listed entities by market capitalization, voluntarily for the financial year 2020-21 and on a mandatory basis thereafter. How many companies are ready?

In the last two years, global investors have begun to demand a continuous monitoring of ESG (environmental, social, and governance) action, reporting, and readiness.

“There is no company whose business model won’t be profoundly affected by the transition to a net-zero economy—one that emits no more carbon dioxide than it removes from the atmosphere by 2050. Companies that are not quickly preparing themselves will see their businesses and valuations suffer, as stakeholders lose confidence that those companies can adapt their business models to the dramatic changes that are coming,” wrote Larry Fink, chairman and CEO of BlackRock, in his 2021 letter to CEOs.

All stakeholders, and particularly the Gen Next, are expressing and echoing these sentiments and a sense of urgency. The message is loud and clear: get to net-zero or perish. Houston, California, Saudi Arabia, and Australia is all asking for climate action in one voice. Recently, Elon Musk’s support of Bitcoin is increasingly under scrutiny due to the immense energy consumed for mining the cryptocurrency. A Cambridge University analysis suggests that the increase in the annual carbon footprint for mining Bitcoins is “equivalent to that of our more than several countries including Argentina and Norway”.

As we cross these turbulent times, let’s commit to gross zero: no new projects with a carbon footprint.

As a nation, India’s commitments towards global sustainability are getting stronger: our vaccine diplomacy; adopting a growth and ESG-intense Budget with the announcement of the clean hydrogen mission; the focus and rapid progress in achieving the UN’s Sustainable Development Goals (SDGs); promising to exceed the Paris agreement targets by committing to 450GW of renewable energy by 2030. The national commitments and targets will percolate down to states, corporates, communities, and individuals.

Globally, the pandemic year witnessed significant activities in terms of key announcements and convergence efforts incorporate ESG reporting:

1) The European Union (EU), the International Finance Reporting Standards(IFRS) Foundation, the International Organization of Securities Commissions (IOSCO), the International Monetary Fund (IMF), and the Institute of International Finance (IIF) highlighted the significance of non-financial reporting and demanded better ESG disclosures and the need for a common global framework.

2) The five framework- and standard-setting institutions of international significance committed to coming together towards building a comprehensive corporate reporting framework.

The 2020 tailwind has undoubtedly induced a sense of urgency in India. Given where India Inc. stands today in ESG reporting and the thrust of actions happening in the global arena towards common reporting framework, it will be prudent to take a look at the puzzling range of reporting options available out there and choose steps that will be progressive, non-redundant and logical to be adopted in 2021-22.

Citation: visualcapitalist

Foundational: (Re)asses materiality

Materiality is key for corporate action. True sustainability will emerge and energize only if the impacts of actions are visible and measured. It is extremely important to involve all key stakeholders in materiality definition. The quality and value of final ESG reporting depend on the appropriateness of materiality indicators and measurements.

Compliance ready: Adopt SEBI’s Business Responsibility and Sustainability Reporting (BRSR) format

In 2020, SEBI issued India’s first ESG-based disclosures in the form of BRSR. BRSR is proposed to be applicable for the top 1,000 listed entities by market capitalization, on a voluntary basis for the financial year 2020-21 and on a mandatory basis thereafter. It will be a good starting point to report on BRSR irrespective of market capitalization and voluntary nature.

Progressive: Adopt globally comparable metrics and disclosures

In 2020, the World Economic Forum (WEF) through its International Business Council (IBC) along with the Big 4 accounting firms compiled a set of common stakeholder capitalism metrics and disclosures. India Inc. may draw upon these to amplify the rigorous work already done by standard-setters. They don't need to reinvent the wheel.

These common metrics and disclosures complement holistic reports such as annual reports and Integrated Reporting (IR). They provide a solution for consistent and comparable measurements on sustainable value creation across global organizations. Being concise, and compiled from six leading global frameworks, adopting the WEF/Big 4 framework is definitely a progressive way forward for 2021.

Globally, around 50-plus companies have committed to this reporting. They include Accenture, Bank of America, Credit Suisse, Dell Technologies, Deloitte, EY, HEINEKEN, IBM, JLL, KPMG, Mastercard, McKinsey, etc. In India, the Mahindra Group, Reliance Industries, L&T Finance, and the Bajaj Group has committed to report on this framework.

An alternate option is to adopt the most widely used framework: the Sustainability Accounting Standards Board or SASB framework.

Leading: Bring it all together with IR

Integrated thinking and reporting are fundamental to the purpose of value creation. IR has seen significant traction and adoption across the globe in the last few years. Over 70 countries have acknowledged and adopted IR so far. IR stands out to be the only holistic and comprehensive framework that has the potential to replace traditional annual reports with significantly increased value, insights, and transparency. IR not only helps businesses to change the way they report but also channels the businesses to reassess their business models, strategy, and risks towards long-term sustainable value creation.

Technically, an organization could adopt IR at any of the stages in the maturity model once integrated thinking is enabled in its core.

Taking a lead in the league will be to bring it all together:

1) Perform a fit-for-context materiality assessment and act on what is true stakeholder materiality.

2) Include relevant regional and global metrics and disclosures supported by reliable data and measurement mechanisms to keep the outcome enhancement cycle going.

3) Track business impacts on relevant UN SDGs and build its traceability to national indicators and targets so the entire community can experience clean tech, air, and water.

4) Bring it all together in Integrated Reporting through the six capitals and enable quantifiable and qualifiable comparison across “Input”, “Output”, and “Outcome” parameters of Integrated Reporting.

This framework can be replicated in the context of any governance body, be it government, corporate, community, or individual.

Over 80 companies in India released their IR last year. We must aggressively ramp this up to 1,000 reports by 2022. Our climate actions on energy transition, clean mobility, reduced plastic use, landfill retrieval, clean beaches, runs for clean neighborhoods, planting a billion trees, and reclaiming a million hectares of wasteland must astonish us and the world.

 -Kapil Naresh Vyas