Trends & Challenges in ESG Landscape of Indian Companies

Trends & Challenges in ESG Landscape of Indian Companies

Introduction

The Twenty First Century belong to India. Though most populous in the world, she is the youngest country with over 65% of the population below the age of 35.  While this is an advantage for the aspiring India that aims to be a developed country by the year 2047, we cannot forget the greatest responsibility that we all have towards the creating a sustainable nation.

Sustainability does not just mean protecting just the environment but encompasses 17 Sustainable Development Goals (SDGs) as envisaged by Niti Ayog. These SDGs are getting percolated into Indian corporates through RBI, SEBI and other institutions who gives policy directions.  In this article, we explore the recent trends, challenges and possible solutions faced across Indian companies.

Regulatory push

• In November 2020, UNDP and Invest India have launched the SDG Investor Map for India, laying out 18 Investment Opportunities Areas (IOAs) in six critical SDG enabling sectors, that can help India push the needle forward on Sustainable Development.
• In May 2021, Securities and Exchange Board of India released Business Responsibility and Sustainability Report (BRSR) format and made it mandatory for the top 1000 listed companies to report their performance against the Nine Principles of the National Guidelines on Responsible Business Conduct (NGRBC) with effect from financial year 2022-23.
• From the year 2022, Reserve Bank of India pushed the banking system to assess the impact of banking finance in climate change and issued guidelines in April 20233 for acceptance of “Green Deposits”.
• SEBI has issued master circular for ESG rating providers in July,2023 to streamline the process.
• Ministry of Corporate Affairs (MCA) mandated Companies to link their CSR and ESG metrics by adhering to the NGRBC guidelines to improve transparency in reporting.

These regulatory changes have started showing the initiatives taken by Indian Companies. 

• It would not be out of context to point out one important judgement of the Supreme Court of India in April 2021 (I.A. NO.85618 OF 2020 – Great India Bustard case) whereby the SC drew the attention to Section 166(2) of Companies Act, 2013 which ordains the Directors of the Company to not only to protect the interest of stakeholders but also the environment. This judgement would serve as a wake-up call for all the companies and not just for those who comply with BRSR formats.

Witnessing a behavioral change

Though the path to achieve SDGs is long, rough, and tough for the Indian Corporates, we are witnessing positive changes in their behavior:

• Boards of large companies are seized of the ESG mandate and now forms part of the regular agenda at their Board meetings.
• Many large companies are outlining their Board policies clearly.
• Board members are getting trained on ESG norms and compliance requirements.
• Companies are investing in R&D to launch environment friendly products.
• Process re-engineering has commenced in many companies to address not only environmental concerns but also to improve human health index of their employees.
• National Stock Exchange has uploaded around 1170 companies BRSR filings as at the end of June, 2024 which demonstrates compliance. 
• Over 20 companies are listed in Dow Jones Sustainability Index
• Large companies are appointing “Chief Sustainability Officers” to oversee the implementation of ESG framework.
• Some companies are fixing timeframe to achieve their KPIs.
• Companies are appointing consultants to advise on ESG and seeking tech-platforms to monitor implementation.
• Companies are seeking third party validation through approved rating companies like, Crisil, CARE & others that adds credibility.

Market Developments

In line with the emerging trends and awareness of sustainability, we can see swift developments in the market that would hasten the progress at the Indian Companies:

• Consumers (mostly younger generation) are prepared to pay more for sustainable products.
• Large companies are mandating their vendors and supply chain partners to adhere to ESG norms.
• Increased awareness on Training and skill upgradation of employees towards ESG programs.
• Sudden surge in the demand for sustainability officers and technical personnel who have exposure to environmental protection.
• Emergence of ESG Mutual funds with over ₹10000 crores in Assets Under Management.
• Many Venture Capital and Private Equity Funds are giving priority to companies that have ESG focus.
• Renewed push by Indian Banking system to fund green products and projects in line with commitment from global financial institutions.
• Emergence of tech-platforms to implement and monitor data on ESG on a continuous basis.

Global Trends & Perspectives

It is no more a secret that we are witnessing climate change that could bring man-made disasters across the world, no more a secret that discrimination among the human races continue unabated, no more a secret that the gap between the rich and the poor are increasing, no more a secret that no amount of regulations can stop greedy corporates to evade corporate governance standards and so on.

Unless a coordinated action plan is taken by all the countries of the world in a measured manner, we cannot improve sustainability of nations. While every political leader agrees with this and trying to be politically correct, withing each region there are serious differences in the approach are emerging.

For example, in the United States, at least 40 anti-ESG laws have been enacted in 18 states which includes

Anti-ESG investing laws seeking to limit the ability of public entities (such as state-sponsored pension plans) to consider ESG-related factors in their investment decisions,

Anti-boycott laws authorizing a blacklist of financial entities that engage in “boycotts” of companies involved in industries such as fossil fuels or firearms,

Contracting restrictions that prohibit contracts with state entities absent verification that the counterparty does not and will not boycott companies in specified industries, such as fossil fuels, timber, mining, agriculture, or firearms, and

Anti-discrimination laws that prohibit state entities or insurers from using social credit or ESG scores.

But some states, like California and New York, are forging ahead with more disclosures on ESG

Whereas the EU adopted a new European Sustainability Reporting Standards (ESRS) with effect from 1st January 2024.

The most important change this standard will bring is a new approach to reporting. Under the principle of “double materiality,” a topic will be material (and thus require reporting) if either (i) it could reasonably be expected to affect the company’s cash flows, access to financing, or cost of capital over the short, medium, or long-term (so- called “financial materiality”) or (ii) the impact of the company’s operations and/or value chains on people or the environment (relating to the relevant reporting item such as pollution, water resources, biodiversity, workforce, etc.) is material (“impact materiality”). This framework reflects a significant shift, particularly for U.S. issuers accustomed to reporting under financial materiality standards.

Practical Challenges in India

1.       Other than few 100 companies in India, most companies feels that BRSR is just a compliance matter and have not paid much attention.  This is visible from the contents of BRSR filings.

2.       Corporate Boards are not spending quality time in linking their corporate and business strategy with ESG.  Leadership teams are not thinking broadly enough about how the macro forces shaping society would eventually impact the business landscape.

3.       Many Boards are yet to adopt ESG policies or form ESG committees due to confusion with CSR committee while there is overlap with other committees, like Corporate Governance, Risk, etc.

4.       Individual Directors either lack training on ESG or people with relevant experience not inducted into the Board.

5.       Companies have not clearly identified material issues and established verifiable data collection in a methodical manner. Most data sit in isolation that becomes difficult to report on a consistent basis.

6.       Many small and medium-sized companies feel that cost of ESG implementation is prohibitive.

7.       Availability of skilled ESG professionals is a real hurdle for internal recruitment.  Outsourcing ESG would pose serious challenges as it would lack accountability.

8.       Lack of cost-effective financing options to implement ESG standards is a hurdle.

Potential solutions

India is in the nascent stages of ESG adaptation.  Hence, it is important to create an ecosystem and all connected institutions should work together in addressing the challenges. Companies can explore some measures suggested below in a timely manner :

1.       Review and evaluate the capabilities of board members and induct Independent Directors who have worked in environment related or social fields with business acumen.

2.       Board should brainstorm and should feel the need for concerted action which would help in formulating deliverable policies and strategies. It would be futile to go all hog and waste resources.

3.       Review the business model to identify high risk products or processes that would become a hot-potato and phase them out.  Alternatively, take action to mitigate the negative effects.

4.       Do not outsource the entire ESG work as such decisions are not sustainable.  It is possible to take help of consultants who could help in structuring the policies, strategies and provide tech platform or train the organization to ensure data integrity. Ultimately, the organization should adopt inherently.

5.       Identify key areas where investment would be required to achieve the targets in the order of priority.  Example – converting coal fired boilers to greener options, or wind/solar energy that would not only justify investments but also help in reaching the targets.

6.       Create a small but effective board monitored internal team with a dashboard to report. Involve key operational people who have decision making skills.

7.       Board should keep ESG as one of their agenda every quarter until such time they are satisfied with the outcome.

8.       Continuously engage with suppliers and service providers to explore innovative options. Sometimes, hard decisions would become necessary to eliminate players who could create harm.

9.       Explore cost effective financing options if the investment is beyond the available means.

10.   Incentivize the supply chain and all internal players for achieving the targets. Entire organization should gear up to implement and reap the fruits of ESG policies.

Conclusion:

While the world and its players could have varying views on ESG, India cannot slow peddle on the key issues affecting our humanity.  We must remember that we are the largest populated country in the world, and we have a collective responsibility to leave the legacy of sustainable future for our future generations.

Having said this, it is important not to bow down to imposed unfair / unrealistic standards by developed countries that could jeopardize our system.

Historically and culturally, Indians had a value system that protected our environment, our people, and the entire society.  We just need to get back to our traditional value systems except that now they are called in various names like ESGs, SDGs, etc.