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ESG Business Responsibility and Sustainability Reporting, India

In the past 20 years, there has been exponential growth in the number of companies reporting ESG data. There was a sharp rise from 20% of S&P 500 companies in 2011 to 85% in 2017 showing that there is an increased focus of investors and stakeholders seeking businesses to be responsible and sustainable towards the environment and society. Thus, reporting of a company’s performance on sustainability-related factors has become as vital as reporting on financial and operational performance.

The simultaneous reaction from the investors’ side was that their interest grew rapidly. They incorporated the ESG data into their investment analytics and into ownership policies and practices. This kind of conscious capitalism that the world is witnessing has striked Responsenet’s interest in partnering with asset managers and treading a new path towards responsible capital and fund management.  

To make things more clear and put them into perspective, we have devised some key concerns regarding the whole ESG regime. The following questions will be able to clear your doubts as to why we are approaching you. 

 

Where is the demand for ESG coming from?

    • Institutional investors: they are increasingly recognizing the potential for ESG (environmental, social, and governance) factors – such as climate risk and poor human rights performance – to affect the valuation and financial performance of the companies they invest in. 

 

  • Consumers: they are equally worthy of the credit for the increased trend towards ESG compliance. Their demand for responsible investment. 

 

    • Adoption of the Paris Agreement on Climate Change and UN SDGs: adapting to and mitigating climate change impact and transitioning to sustainable economies have emerged as major issues globally. 

 

  • COVID Pandemic: The COVID-19 pandemic prompted the most severe market crash since the global financial crisis, but for investors who focus on ESG issues, there was some comfort to be found in the relative resilience of high-rated ESG funds.
  • Stakeholder capitalism: the orientation of serving all the stakeholders of a company- customers, suppliers, employees, shareholders, and local communities, corporations are increasingly becoming wary of the sustainability factors of the ESG. 

 

 

What are the challenges faced by Asset Management Companies with respect to ESG?

  • Complex and overlapping topography of the ESG areas
  • Differential pressure and anticipations of the investors.
  • Lack of adequate reporting framework and data regarding the ESG metrics and terminology.
  • The dearth of awareness regarding the long-term financial gains made by including sustainable practices in their business. 

This demand has been accelerating and is pressurising the AMCs to integrate ESG considerations into their investment approaches. 

What are the utility/benefits of ESG?

  • It provides an opportunity for a business to evaluate its impact on and position in an increasingly sustainable market.
  • Investors using ESG data would be able to make better investment decisions and thus, widespread disclosure of such data would improve market efficiency. 
  • Cost reductions: Effective ESG execution helps combat rising operational expenses such as raw material costs. These cost reductions from ESG have been found to boost operating profits by as much as 60%.
  • Top-line growth: A strong ESG performance allows organizations to tap into new markets and expand in existing ones. Government bodies are more likely to trust corporate actors with strong ESG metrics.
  • Minimal regulatory and legal interventions: ESG strength reduces the risk of adverse government action. Analysis shows that typically ⅓ of a business’s profits are at risk from state intervention through non-compliance.
  • Higher employee productivity: A strong ESG proposition helps organizations attract, and retain quality employees. It also enhances employee motivation by providing a sense of purpose. Employee satisfaction is positively associated with shareholder return.
  • Optimal investment and capital expenditure: Strong ESG propositions can avoid stranded investments that do not pay off in the long term due to regulatory and market shifts. E.g. bans on single-use plastic.
  • Improved risk management and innovation: Sustainability initiatives at corporations appear to drive financial performance due to factors such as improved risk management and more innovation

ESG integration should be seen as an investment strategy and not as a burden. A firm’s non-financial performance is a major booster in evaluating its overall performance. Not to forget that the Non-Financials of a company, if not accounted for, pose a serious threat to the financial as well as the social capital of the company.

 

What are the parameters of a company’s performance on ESG?

SEBI, in May 2021 introduced new reporting requirements for sustainability by listed entities. This Business Responsibility and Sustainability Reporting (BRSR) will replace the Business Responsibility Report (BRR). It is applicable to the top 1,000 listed entities (by market capitalization), with voluntary implementation for FY22 and mandatory implementation from FY2023. 

The 9 Principles and Core Elements of Section-C of the BRSR guidelines are aimed at helping entities demonstrate their performance in integrating with key processes and decisions:

  • Businesses should conduct and govern themselves with integrity, and in a manner that is Ethical, Transparent and Accountable.
  • Businesses should provide goods and services in a manner that is sustainable and safe.
  • Businesses should respect and promote the well-being of all employees, including those in their value chains
  • Businesses should respect the interests of and be responsive to all its stakeholders
  • Businesses should respect and promote human rights
  • Businesses should respect and make efforts to protect and restore the environment
  • Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent
  • Businesses should promote inclusive growth and equitable development
  • Businesses should engage with and provide value to their consumers in a responsible manner

 

How is the BRSR regulation of SEBI improving ESG disclosures? 

  • Promote transparent, standardized and improved disclosures on ESG parameters
  • Easier comparability across sectors and time periods
  • Help companies better demonstrate their sustainability objectives
  • Long-term value creation and increasing investors’ ability to make informed ESG-related decisions.
  • Reassess materiality
    • True sustainability impacts of actions are visible and measured
    • Appropriate materiality indicators and measurements for quality reporting
    • Involve all key stakeholders in materiality definition. 

ESG Data for listed companies:

  • Out of the top 20 listed companies in India only Infosys (#1) has managed to score an overall ‘A’ grade on ESG metrics.
  • In ‘Social’, the top 5 companies in decreasing order of rank were

 

Social: Top 5 Companies
Grade  Rank Company Name Industry
A 1 Adani Transmission Power
A 2 Mahindra & Mahindra Automobile
A 3 Larsen & Toubro Infotech IT
A 4 Infosys IT
A 5 Hindalco Industries Metals

Source: Stakeholders Empowerment Services’ Report: ESG Scores of Top 100 Listed Companies in India

  • In ‘Governance’ top 5 companies in decreasing order of rank were
Governance: Top 5 Companies
Grade Rank Company Name Industry
A+ 1 Infosys Ltd. IT
A+ 2 Info Edge (India) Ltd. IT
A+ 3 Housing Development Finance Corporation Ltd. Finance – Non-Banking
A+ 4 ICICI Lombard General Insurance Company Ltd. Finance – Non-Banking
A+ 5 Mahindra & Mahindra Ltd.  Automobile

Source: Stakeholders Empowerment Services’ Report: ESG Scores of Top 100 Listed Companies in India

  • In ‘Environment’ top 5 companies in decreasing order of rank were
Environment: Top 5 Companies
Grade Rank Company Name Industry
  A+ 1 ITC Ltd. Consumer Goods
A 2 Adani Ports and SEZ Services
A 3 Infosys Ltd. IT
A 4 Mahindra & Mahindra Ltd. Automobile
A 5 Marico Ltd.  Consumer Goods

Source: Stakeholders Empowerment Services’ Report: ESG Scores of Top 100 Listed Companies in India

  • List of top performing ESG Mutual Funds in 2022

 

Fund Name Assets under management (AUM) 1Y CAGR 3Y CAGR  Till Date CAGR
SBI Magnum Equity ESG Fund 4085.427 Cr 3.8% 13.8% 11.6%
Quantum India ESG Equity Fund 56.02 Cr -1.6% 16.2% 15.9%
Quant ESG Equity Fund 77.966 Cr 18.7% 48%
Aditya Birla Sun Life ESG Fund 908.408 Cr -2.3% 8.8%
HDFC Housing Opportunities Fund 1106.986 Cr -1.2% 8.3% 4%

  https://scripbox.com/mutual-fund/esg-funds?verdict=top-ranked&fund-option=growth

 

What we do

We intend to bridge the gap between corporates/businesses on one hand and the asset managers on the other hand so that, together, we pave the way for maintaining the quality and integrity of the materiality matrix by active management with the intended stakeholders. This is to ensure that the investors’ confidence in the market is not swayed by ill-conceived data. 

In this pursuit of this collaborative effort, we would aim to cater to the following areas vis-a-vis ESG:

  • Development of an ESG strategy that works perfectly for you and looks for viable options where you can initiate, invest and manage sustainable projects. 
  • Implementation of the strategy with a comprehensive oversight
  • Monitoring, evaluation, and reporting of the performance on the lines of the ESG indicators from the BRSR guidelines
    • Materiality Assessment and Integration with Enterprise Risk Management
    • Capacity-building Sessions for corporates for material ESG performance 
    • Verification of the ESG data, methodologies at sites, tools 
    • Monthly, quarterly, and Annual disclosure verification and impact assessment 
    • Stakeholders communication
  • Working as per the BRSR guidelines to review trends and demand of the investors. 
  • Materiality Assessment and Integration with Enterprise Risk Management
  • Capacity-building Sessions for corporates for material ESG performance 
  • Verification of the ESG data, methodologies at sites, and tools 
  • Monthly, quarterly, and Annual disclosure verification and impact assessment 
  • Stakeholders communication

 

Having experience of implementing sustainable projects, Responsenet has collaborated with numerous companies for their CSR implementation activities. Pacing in this new venture, we are looking for partners whom we can work with and create socially and environmentally responsible business practices. 

FAQs:

 

  • What does ESG mean?

 

      1. ESG stands for environmental, social, and governance standards. The acronym refers to a trio of business measures used by socially conscious investors to identify and vet investments.
      2. Environmental benchmarks address the way an organization responds to environmental issues, such as climate change and greenhouse gas (GHG) emissions, energy efficiency, renewable energy, green products and infrastructure, carbon footprint, and water conservation.
      3. Social benchmarks address how companies respond to complex and evolving issues like data privacy, pay equity, health and safety, diversity and inclusion, social justice positions, and employee treatment.
      4. Governance deals with issues such as executive compensation, golden parachutes, diversity and independence of the board of directors and management team, proxy access, classified board of directors, whether chairman and CEO roles are separate, majority vs. plurality voting for directors, dual-or multiple-class stock structures, and transparency in communication with shareholders.

 

  • What Is the Difference Between CSR and ESG?

 

      1. CSR, which stands for “corporate social responsibility,” has been on the business radar for years and refers to “softer,” qualitative issues. As time went by, social issues came into focus, and technology advanced, it has become possible (and desirable) to quantify a company’s use of natural resources, conflict minerals, social composition and impact, and good governance. ESG data elevates these issues to the investor position, while technology has made it possible to gather more granular reporting data. ESG is the quantifiable measure of a company’s sustainability and societal impact, using metrics that matter to investors

 

  • What are the examples of CSR and ESG?

 

    1. There is still some confusion in the industry around these terms. As a rule of thumb, CSR is about providing accountability within your organization while ESG aims to collect and measure metrics relevant to your business objectives and stakeholders.
    2. Here are a few examples of each:

 

Corporate Social Responsibility  Environmental, Social, and Governance
Community involvement or volunteering GHG emissions and climate risk
Helping employees advance careers % of women/people of color (POC) on the board
Participating in fair trade agreements Pay equity, diversity, and inclusion
Donating products or services Ethical behavior and anti-corruption

 

 

  • Why Is ESG Important for Risk and Compliance Managers?

 

      1. The United States does not have a mandated and standardized ESG disclosure framework on the books today – but that is likely to change soon; in the meantime, high-performing companies are finding ways to build resilience, satisfy investors, and be transparent with their customers.

 

  • What is materiality assessment?

 

    1. Materiality means analyzing which issues are the most important to be addressed by businesses. After identifying potential sustainability issues thought to be directly relevant to an organization’s value chain, these issues are analyzed using 2 different lenses. So for issues such as reducing plastic packaging, sharing wealth, or working with sustainable suppliers, the organization needs to evaluate: 
      1. what’s the potential of each issue to positively or negatively impact organizational growth, cost, or trust and 
      2. how important is each issue to stakeholders?  
      3. The ultimate result is a visual representation of which issues should be prioritized according to their importance to the company’s success and stakeholders’ expectations (that can directly affect the first).