Navigating the Undercurrents of ESG

ESG focused ecosystems enable cohesive growth environment, both externally and internally

Prominence of Environmental, Social and Governance (ESG) has never been more important than now, given the continued and increasing investment in Indian market, emergence of multiple start-up Unicorns and evolving regulatory landscape.

To be at par with the global practices and legislative obligations, the boards of directors of Indian companies may consider articulating the definition of shareholder return and address cultural practices that may impact ESG. Moreover, changing work practices spurred by the recent pandemic may require extra efforts or specific initiatives to rally dispersed employees behind the importance of ESG compliance.

Existing key Indian ESG legislations

In India, the ESG regulatory framework is not consolidated under one law. Numerous legislations dealing with their core area of law impose certain obligations and disclosure requirements related to ESG matters. These regulations are scattered under various legislative frameworks such as the Factories Act, 1948, the Environment Protection Act, 1986, the Water (Prevention and Control of Pollution) Act, 1974, the Prevention of Money Laundering Act, 2002, the Prevention of Corruption Act, 1988, the Companies Act, 2013, MCA’s National Guidelines on Responsible Business Conduct and the SEBI regulations prescribing the compliance and disclosure requirements for the ESG matters. Interestingly, just last May, SEBI amended SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to introduce Business Responsibility and Sustainability Reporting framework for the top 1000 (one thousand) listed companies in India.

Corporate approach to ESG factors

The corporates are required to recognize their business models not merely as a tool of wealth creation but also as an instrument to bring long term sustainable changes in the ESG ecosystem. While considering the ESG factors, a board may find difficulty in bringing a balance between the promoters’ expectations and the stakeholders’ concerns. In this situation, the board’s assertive explanation and long-term sustainability strategy may provide a solution and comfort to all the parties involved. Therefore, it is important for the board to assess the company’s vulnerability when considering a solution that appeases all stakeholders. The board can also consider D&O insurance policy, which offers protection on ESG matters.

ESG impact on corporate growth

ESG focused ecosystems enable cohesive growth environment, both externally (investors and customers) and internally (employees and company culture). Whereas previously investors used to evaluate primarily monetary benefits as internal and external benchmarks, now ESG factors have gained significance in long term sustainable growth and several global funds heavily rely on the ESG rating to evaluate a company’s exposure to ESG risks. Therefore, Indian boards are being required to start devising their policies to fulfil the ESG metrics and offer additional confidence in long-term stakeholder comfort and shareholder return. As an example, the board may make the ESG metrics mandatory for determining bonuses and compensation of management. More importantly, the board must avoid engaging in a tick box or ribbon cutting approach when addressing these issues.

The ESG stakeholder model

Listed below are some of the factors that can be considered while developing a stakeholder model addressing ESG commitments:

Environment: Subject to the nature of a company’s operation, a board could consider pro-efficiency and pro-environmental policies, such as commitment for reduction of greenhouse gases, utilization of the renewable energies, appropriate policy on waste, electronic equipment, and battery waste disposal. The global efficiency certificate such as Alliance for Water Stewardship certification, which is considered as the global benchmark for water stewardship, may also be considered by the board. It may also set up internal timelines for becoming carbon neutral, as well as conduct environment impact assessment and green audits.

Shareholders: Shareholder concerns may lead to litigations, which must be proactively addressed and guarded against. Periodically disclosing ESG benchmarks may also help with shareholder approval. Practically, the ESG compliances may cause additional financial burden which will require shareholder buy-in.

Community: The Companies Act, 2013 introduced the concept of Corporate Social Responsibility (“CSR”) as a corporate initiative to give back to the community. This is primarily referred to as “corporate citizenship”. In addition to the CSR matters, the board can sensitize its members to cultural differences and devise its social media policy to prevent any political association and social controversies.

Human Resource: Board can ensure that there are adequate policies in place for equal remunerations, prevention of sexual harassment, data protection and equal opportunity. Also, adequate anti-corruption protocols, transparent accounting practices, and regular non-financial disclosures must be handled with utmost sincerity.

Consumer and Product: Consumers are increasingly becoming more sensitive to ESG issues. Depending on the nature of operations, some industry specific innovations such as green warehousing, clean distribution, smart energy self-sufficient building, water harvesting, methane free agriculture, chemical free sustained products and green-house free diary operations may be developed.

As each company has its own ESG landscape and there is no one solution that fits all, it is essential to establish business specific ESG goals and roadmap while also considering the risks, challenges, opportunities, and options. ESG stakeholder model must be developed complying with the applicable legislative norms and rituals.

[author title=”” image=”http://”]About the Author

Rupinder Malik is Partner at JSA[/author]

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members

 

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of ET Edge Insights, its management, or its members

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