Do not reduce the ‘S’ in ESG to another tick box item

The ‘social’ pillar under the Business Responsibility and Sustainability Reporting (BRSR) format is supposed to focus on policies, practices and their impact regarding human rights, business ethics, supply chain management, diversity, and inclusion. While the BRSR is voluntary for the top 1,000 listed entities for this fiscal year, it will be mandatory from FY22.

Compliance Narrative

As companies gear up to adopt the new format of reporting, analyses show India Inc. lagging behind in workforce-related matters, despite existing regulations and a formal reporting structure in place. India has ranked 151^st globally in economic participation and opportunity, and 117th in wage equality in similar work as per the Gender Gap Index in 2021. This indicates that India may need nearly 100 years to bridge this gap.

Employment of people with disabilities throws up another grim picture. Public sector companies hire 0.54 percent (as against a regulated 4 percent), the figure is 0.28 percent in private sector, and an abysmal 0.05 percent amongst multinationals. The negligible percentage of employees with disabilities in multinationals, is particularly surprising, considering these companies follow strict quotas and laws in countries where they are headquartered.

A December 2020 survey on diversity reveals further tokenism. While women hold 17 percent of board positions in India Inc., doing better than many Asian peers, when it comes to leadership, only 11 percent committee chairs are held by women, against 27.3 percent globally.

The inferior working conditions, and terms and conditions of contract workers, who constitute 34 percent of India’s workforce, is another cause for concern. They are routinely paid less than minimum wages, and the amount is insufficient for survival. Contract workers are also regularly denied access to the Indian national social security and medical insurance schemes.

A majority of workforce-related aspects are addressed under existing regulations covering wages, occupational safety, social security, and industrial relations. However, the above statistics show discrepancies in the compliance narrative.

To take on the onerous quantitative and qualitative analysis required under the BRSR, companies may evaluate their positions and outlook by conducting a sensitivity analysis to obtain a range of possible fair values. Integrating the ESG analysis generally works better on negative rather than on positive issues.

Addressing Stakeholders’ Interests

The BRSR also requires companies to demonstrate their efforts in identifying, and addressing the interests of stakeholders, particularly disadvantaged, marginalised, and vulnerable groups, under Principle 4. In this regard, identifying the right stakeholders, appropriate rationale, and an effective communication methodology are critical. A well-defined scope for this engagement, as well as metrics for its effectiveness are key to successfully implementing this principle, and developing the parameters for reporting.

Human Rights Impact

Regulatory requirement of the CSR spends ensures that Indian companies do well in terms of framing the CSR policies, and creating programmes addressing human rights. But companies fall way behind in impact assessment of the outcome of these the CSR efforts. Principle 5 of the BRSR requires companies to demonstrate the human rights impact or issues caused or contributed to by the business. Effective reporting on this metric, requires companies to address employee trainings, internal policies, accountability, and incentives on employees’ contribution to public policy.

Well-publicised whistle blowing mechanisms with adequate safeguards is another step to ensure that employees voice their concerns with respect to human rights. It can be instrumental to leverage the Social Return on Investment (SROI) framework that helps in measuring the value created in social, human or environmental terms, and represents it in a monetary value.

Reporting on the Social Issues Governing Supply Chain

Across principles, the BRSR also provides essential and leadership indicators. Leadership indicators need companies to assess their supply chain and demonstrate proactive steps taken to prevent discrimination, and human rights violation. Companies also need to elaborate how stakeholder inputs have been incorporated in action plans, and demonstrate process changes considering any complaints received on human rights violation.

Regulations and intent are only half the story, and the ground reality is starkly different. A 2020 sustainability report by the CII shows supplier audits reveal 61 percent non-compliances under health, safety and hygiene category. In 30 percent cases there are violations of working hours and overtime, and inconsistencies in records and monitoring systems (35 percent) being the biggest worries under this category.

The BRSR framework on social factors has the potential to bring sweeping changes in the way India Inc. treats its workforce and other stakeholders. However, there is clearly a lot of work left undone. Companies will have to undertake careful and professional assessment of risk areas, and set immediate and long-term goals to demonstrate long-term value creation. A failure to do so will simply reduce the ‘S’ of the ESG to just another tick in the box within the ever-lengthening checklist of corporate compliances.

Jignesh Thakkar is Leader, Global Compliance Solution, and Versha Goenka is Associate Partner, Business Consulting, EY.

Views are personal and do not represent the stand of this publication.