Environmental, Social, and Governance (ESG) factors have gained significant interest from and traction with investors and regulators over the past few years. This rapid increase comes from solid research showing the strong correlation between companies that manage ESG factors well and lower long-term risk and higher financial performance. ESG-integrated funds have historically outperformed their counterparts by lowering risk, increasing productivity, better brand image, and a higher valuation premium.
Environmental, social, and governance (ESG) factors are becoming increasingly important for companies because they can have a significant impact on a company’s financial performance and long-term sustainability.
Environmental factors: Climate change and other environmental issues can have a major impact on a company’s operations and reputation, as well as on the communities in which it operates. Companies that take proactive steps to reduce their environmental impact and to promote sustainable practices can benefit from cost savings, increased efficiency, and improved brand reputation.
Social factors: Companies have a responsibility to ensure that their operations do not harm the communities in which they operate, and they must also ensure that they are treating their employees and other stakeholders fairly. Companies that prioritize social issues such as labor rights, human rights, and community engagement can benefit from improved employee morale, increased brand loyalty, and reduced legal and reputational risks.
Governance factors: Strong corporate governance practices are essential for ensuring that a company is managed in the best interests of its shareholders and other stakeholders. Companies that prioritize transparency, accountability, and ethical behavior can benefit from improved investor confidence, reduced regulatory risks, and better decision-making.
Overall, considering ESG factors can help companies to identify and manage risks, improve long-term performance, and create shared value for the company, its stakeholders, and society. Additionally, as more and more investors are looking for sustainable investment opportunities, companies that have a good track record in ESG can attract more investments.
Many ESG factors will have a large impact on business and society in India over the next 10 years: economic inequality, gender inequality, waste, air pollution, and access to water.
Extreme weather events, climate change, and social impacts increasingly affect how businesses source goods, manufacture products, and interact with the communities they serve and operate in. While the traditional focus has been on environmental impacts, the global pandemic has increasingly shed light on many social aspects of ESG as more companies want to showcase their social commitments and actions.
Conversely, poorly managed ESG factors can result in damaged reputations and stakeholder relationships, resulting in poor financial performance and outlook. Given the challenges we are facing to meet the environmental and social targets by 2030, understanding these risks is critical for investors to make informed decisions. Sustainable investing is not something that will be going away, and investors cannot afford to continue only considering financial metrics when assessing companies.
State of ESG Disclosures in India
ESG investing has gained significant traction in Europe and North America, yet it is still in a nascent stage in India. Reporting and disclosure have historically lagged in comparison to other regions. Nevertheless, regulatory frameworks on corporate governance and reporting, recent government initiatives, and a new sense of corporate responsibility are launching India toward ESG investing.
Over the past 10 years, government regulation on disclosure has widened the provisions and number of companies that are mandated to report on ESG factors:
- 2011 – Ministry of Corporate Affairs released the National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business, outlining nine voluntary principles for Indian businesses to follow in order to operate in an economically, socially, and environmentally sustainable manner.
- 2012 – Securities and Exchange Board of India (SEBI) mandated the largest 100 listed companies to publish an annual Business Responsibility Report (BRR), which was expanded to the 500 largest in 2016. In 2017, SEBI asked the top 500 companies to voluntarily adopt an integrated reporting framework, in lieu of separate annual and CSR reports.
- 2013 – Ministry of Corporate Affairs issues the Companies Act 2013, Section 135, requiring companies with a net worth over 5 billion rupees, or a net profit over 50 million rupees, to establish a CSR committee of the board, develop CSR policies, and spend at least 2% of the average of the previous three years profits on CSR policies, and report on activities.
- 2018 – Bombay Stock Exchange issued a new set of ESG reporting recommendations.
Last week, Narendra Modi, Prime Minister of India, publicly supported ESG investing:
Both companies and investors are increasingly considering how ESG factors relate to them. Many companies have adopted reporting standards outlined by the Global Reporting Initiative (GRI), SEBI, and the Companies Act 2013, and incorporated the United Nations Sustainable Development Goals into corporate strategy. Greater regulations and demand from investors will aid in further disclosure, disclosure standards, and ESG investment growth.
Company ESG Information for Investors
The main barrier for investors to get comprehensive data is the lack of comparable data sets. Even though reporting for the largest companies is mandated, there remains inconsistency in disclosure methods. Given the current governmental requirements in India, most disclosure information is directed to regulatory bodies, such as government ministries, and is not necessarily released to the market. Currently, the most common channels for ESG information lie in mainstream annual, integrated, or sustainability reports, as well as some specialist systems, like 3rd party rating agencies.
Where to start:
- A company’s integrated report
- A company’s annual report, and separate sustainability report
- Investor surveys and questions sent directly to the company
- 3rd party rating agencies, such as:
- MSCI ESG Ratings: measures a company’s resilience to long-term, financially relevant ESG risks
- Sustainalytics’ ESG Risk Ratings: clear insights into ESG risks of companies
Investors that are new to evaluating companies on ESG factors should consider the following questions when starting their journey:
- Has the company stated ESG goals and policies and outlined the progress they’ve made toward them?
- Are the goals mapped to the UN’s Sustainable Development Goals?
- How is the governance for responsible business structured?
- How forthcoming are companies with respect to responsible business activities & performance?
- How well are key stakeholders (employees, community, customers, and suppliers) integrated within a company’s responsible business framework?
- How pervasive are sustainability practices and targets (initiatives and targets to manage waste, water, energy, and emissions)?
- Is the company spending at least 2% of the average of the previous three years’ profits on CSR initiatives?
It is important to note that, corporate social responsibility reporting in India is only mandatory for the 500 largest companies and voluntary for others. Additionally, full ESG reporting is still only voluntary for companies of all sizes. In order to make to push toward more comprehensive reporting, investors need to communicate to issuers the ESG information they would like.
Additional ESG Resources for Investors
- Reporting Exchange – Initiative of the World Business Council for Sustainable Development (WBCSD). The Reporting Exchange is a free online resource for ESG reporting – collating comprehensive and reliable information on ESG reporting requirements and resources across more than 70 countries.
- SASB Materiality Map – Helps stakeholders understand ESG issues that are likely to affect the financial condition or operating performance of companies within particular industries
- CDP company surveys – CDP runs a global disclosure system for investors, companies, city-states, and regions to manage their environmental impact. This database houses all public corporate, city, state, and region responses to CDP questionnaires for current and previous years.
- Futurescape’s Responsible Business Rankings – India’s Top Companies for Sustainability and CSR 2020
- Soon to come: Terrasustain’s ESG training for Investors