Prioritising the adoption of environmental, social and governance (ESG) best practices can help Indian companies enhance their competitiveness and attract capital, alongside contributing to a more sustainable world. The government estimates the economy to reach the $7 trillion mark by 2030. To supplement this growth, sustainability will play a pivotal role in building resilient, viable and impactful businesses in India. This becomes even more pertinent given the fact that India contributes nearly 9 percent of the global GDP and constitutes nearly 18 percent of the population globally.
The world over, the importance of ESG has grown manifold in recent years — spurred by investors, policymakers, regulators, corporates, and customers alike — in view of multiplying climate change events, supply chain issues, and widening economic and social gaps.
The benefits it offers are many and widely acknowledged — sustainable profitability, higher ability to attract capital, stronger stakeholder relations, edge over competition, enhanced employee well-being and thereby improved ability to attract talent, to name some.
Hence the call to ESG adoption.
That said, while some organisations in India have reached a certain degree of ESG maturity, the majority are still in the nascent stage of integrating ESG within their operations. In this scenario, adopting several global best practices can help Indian organisations help strengthen their ESG performance.
A closer look at the three aspects reveals the imperatives for India.
Environmental – Need to Step Up Commitments
India is the world’s third-largest emitter of greenhouse gases in absolute terms, after China and the United States (US). However, data from Science Based Target initiative (SBTi) reveals that the share of Indian companies among global commitments for science-based targets to reduce emissions is less than 3 percent. The United Kingdom and the US dominate the list with 17 percent and 13 percent share, respectively.
Having credible environmental commitments in place and a roadmap to achieve that can set the tone for the transition to sustainability. Besides commitment to SBTi, organisations globally have also signed up to RE100 (sourcing 100 percent electricity from renewable energy by 2050) and EV100 (to transition their fleets to electric vehicles and install charging infrastructure for staff and customers by 2030) commitments.
It is equally imperative for organisations to focus on strengthening the performance of their supply chains. Several sectors, including chemicals, pharmaceuticals, construction, transport, metals and mining, agriculture and paper, have significant supply chain footprint. Therefore, it is essential that organisations identify emission hot spots and address risks within their supply chains.
Further, given the widespread impacts of physical events, it is also essential that businesses assess and integrate climate-related risks within the organisations using the enterprise risk management framework to minimise the effect on their operations.
Social – Managing Relationships
The ‘social’ element is centred around how a company manages its relationships with various stakeholders such as employees, customers, communities and supply chain. A balance between social responsibility and profitability can keep social risks at bay.
An important ingredient of the social aspect is diversity, equity and inclusion, which can indirectly improve the financial performance of an organisation, promote better decision-making, foster team building as well as drive growth and innovation. Indian Inc could take a cue from countries like the US on gender diversity, where women constitute over half the total workforce as against a quarter in India.
Some other good practices on the social front include promotion of health and safety practices at workplaces, conducting employee and customer satisfaction surveys, ensuring human rights within the organisation as well as the supply chain, training and upskilling employees including inculcating importance of sustainability, and having a robust grievance redressal mechanism for stakeholders.
Governance – Discharging Fiduciary Responsibility
The ‘governance’ pillar of ESG factors how well a company discharges its fiduciary responsibility towards its stakeholders. Good governance promotes strong environmental and social practices within the organisation. Strong Board oversight with clear accountability of ESG issues can go a long way in enhancing an organisation’s sustainability quotient. This may be achieved by having a separate board-level ESG committee with well-defined terms of reference.
Further, linking sustainability performance with key responsibility areas of board members is a widespread practice globally. The independence of board members is also a critical ingredient for good governance. It ensures that they act in the best interest of stakeholders. In Indian companies, on average, 50 percent of board members are independent; this figure is over three-fourths in many developed countries.
Other notable practices include having an independent chairperson, independent board committees, at least one-third gender diversity on the board, board members with ESG competency, clawback provisions for variable compensation of board members, regular board evaluation and a tax transparency policy at the organisation level.
ESG Practices To Emulate
At an overarching level, organisations should consider setting up goals and targets for each material issue within the environmental, social and governance pillars for the near term as well as the long term. Further, it is essential that organisations disclose and report their ESG performance publicly in a consistent and transparent manner through a sustainability report or an integrated report, at least annually. Disclosing ESG performance for the previous two years in addition to the reporting year will ensure better comparability. Disclosing the progress of targets and other ESG commitments in sustainability disclosures is another practice adopted widely by top-notch global companies.
The operation of financial institutions (FIs), which are systemically critical institutions, significantly influences economic activity. Hence, it is necessary that FIs integrate ESG risks in their lending and investment decisions. FIs should set sustainable financing targets for their portfolios. In addition, they should conduct environmental and social impact assessments of their respective portfolios to showcase their impact in tune with global peers.
Conclusion
ESG-centric companies tend to have better operational efficiency, strong governance, increased innovation, reduced risk, and better compliance – all of which integrate and resonate with stakeholder expectations. ESG integration within operations is a win-win solution for a company as well as its stakeholders. However, this requires long-term commitments as well as imbibing a culture of ESG-centric practices at the grassroots level. Indian companies can draw a leaf out of some of the global practices to achieve their ESG goals and build more sustainable, resilient and responsible businesses for the future.
Pranav Master is Director – Consulting, CRISIL Market Intelligence and Analytics. Views are personal, and do not represent the stand of this publication.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
