Building a Case for ESG

A better consideration of environmental, social and governance factors will ultimately contribute to stronger and more resilient investment markets, as well as contribute to the sustainable development of societies, noted the Who Cares Wins report of The Global Impact initiative of the United Nations, published in 2005. However, nearly two decades later, the concept remains restricted to the domain of mandatory compliance, despite the fact that the need to adopt it and the leverage it gives to businesses has only got bigger over time.

Mandatory disclosure requirements have increased since the first time Indian market regulator Securities and Exchange Board of India (SEBI) mandated the Business Responsibility Report (BRR) for top 100 listed companies in India. This was increased to top 500 in 2016–17. The Business Responsibility and Sustainability Report (BRSR), with more disclosure requirements, replaced BRR starting fiscal 2022–23 and was made mandatory for top 1,000 listed companies. This year, SEBI introduced Core BRSR which aims to address concerns related to ESG ratings by improving transparency and reliability in disclosures.

However, not many outside the ambit of law bother about ESG integration into their businesses. The cross-cutting reason is the lack of awareness across companies, particularly of medium and small scale, about the nuances of the ESG ecosystem. Awareness deficit can be due to the ever-evolving nature of regulatory frameworks and public unavailability of good practice templates in policies and operations. Lack of evidences about the costs and benefits of adopting ESG practices and risks of not doing so are other contributing factors towards
low adoption.

Governance Inconsonance

A lack of a common governance instrument makes comparability difficult, thereby influencing the objectivity of the decisions of investors and financial institutions. Overcoming this challenge not only eats up more resources, but is also burdensome for companies. The burden gets compounded for companies operating out of more than one geography because environmental standards vary across countries as these are guided by the nationally determined contributions.

Though the International Sustainability Standards Board (ISSB) is working to standardise sustainability reporting globally, some people in the know of things do not see it as a panacea. Sanjeev Kumar Singhal, vice-chair, Sustainability Reporting Standards Board, Institute of Chartered Accountants of India (ICAI), says, “The ISSB standards are way off the mark and put an onerous burden on companies.” He adds, “There is a need to integrate the financial and non-financial reporting standards. What we need is a common set of standards.” While the ISSB standards are a reality, integration of financial and non-financial reporting standards may not happen anytime soon.

Data Gaps: A Hurdle

At an operational level, technology is a useful way forward and can help companies cater to multiple ESG standards and frameworks. “Companies have several technological options to navigate the complexities of ESG reporting and compliance. These include integrated data management system, automation and analytics and ESG reporting platforms,” says Vaishali Nigam Sinha, Co-Founder and Chairperson, Sustainability, Renew, a global renewable energy company.

However, the effective use of technology for data management depends upon the availability and quality of the data used for inputs. “Getting ESG data across different functions and sources is not an easy task. While large companies have the resources to do so, small companies may not,” says Preeta Misra, senior director at Dun & Bradstreet India, a business-to-business data provider. She heads the Credibility and Business Insights Group, ESG and SME, in the organisation. “India’s realisation of the net-zero target by 2070 will not be possible unless large companies and their supplier ecosystem, which are the small companies, work towards ESG data disclosures to start with,” she adds.

The quality of data is impacted by three major factors. According to Nigam Sinha, the diverse nature of data, ranging from environmental impacts to social performance and governance practices, increases the complexity, making data suspect. “Certain indicators as in the cases of biodiversity and water stewardship, which are based on a largely varying and unquantified approach, may have limitations in terms of accuracy. Besides, ESG data can come from various sources, including company disclosures, third-party data providers, industry associations and self-reported surveys and it requires time and effort to ensure the reliability and credibility of these sources,” she says.

Data Challenges

Data deficit or its suspect quality impacts the integrity of disclosure, thereby compromising the embedding of ESG parameters in policy and practices and tracking performance. Besides, sparse availability of quality data publicly affects comparability by third-party rating agencies, thereby affecting the objectivity of investor decisions.

The challenges are more pronounced in the case of Scope 3 emissions which are indirect and controlled by external value chain entities. This is important considering that in many industries, they account for a majority of the total emissions, unlike the direct Scope 1 emissions, and the indirect Scope 2 emissions which come from purchased energy.

While mandatory disclosures have improved data integrity in large companies, the real challenge is in the case of small and medium-sized businesses (SMBs).

Preeta Misra says, “SMBs is where the data challenge lies and they need support from different stakeholders like the government, development institutions and large corporates to start their ESG journey. It starts with being open to sharing data, understanding where they stand on ESG and then planning the next steps.”

Another challenge is the dearth of skilled professionals, which affects the quality of reporting and the ability to adopt ESG-compliant practices. Praveen Saxena, chief executive officer of Skill Council for Green Jobs, a Central government initiative for skill development in the green business sector, agrees that there is a lack of skilled people who can understand the implementation of sustainability and its long-term impact. “A battery of trained manpower needs to be created. The subject needs to be introduced as part of regular curriculum and in the skill development short-term courses. This needs to be taken seriously at all levels in education,” he says.

Apart from generic challenges, companies also have to contend with the ones specific to the nature of their business. For example, it is extremely difficult for those in hard-to-abate sectors to become ESG-compliant with limited technology solutions currently available in the market. External factors like the Covid-19 pandemic, natural or anthropogenic disasters and armed conflicts can multiply the challenges.

Beating the Odds

Data management systems combined with cloud-based platforms can help companies collect, manage and integrate ESG data from various sources across their operations, which allows for better analysis, reporting and comparison against multiple ESG standards and frameworks. Analytics tools and technologies can also aid in identifying gaps and areas for improvement in ESG performance. Specialised ESG reporting platforms assist companies in managing and reporting data. Companies can leverage these platforms to streamline their reporting processes, ensure compliance with multiple standards and generate accurate reports efficiently, says Nigam Sinha.

On the matter of expenses, Anjana Seshadri, vice-president of Neev Funds which invests in sustainable growth of small and medium enterprises, feels that ESG compliance needs to become an inherent part of every business such that companies do not see it as an additional expense in the books. Explaining the ways in which companies can raise funds to align their businesses with the ESG norms, she says, “Efficient outreach within the impact investing circles, applying for government grants and subsidies, pitching to ESG-focused funds and collaborating with like-minded organisations are just a few ways in which companies can raise capital.”

Smita Pandey Mishra, founder of Fandoro Technologies, a SaaS startup and consulting firm working with MSMEs, says, “Firstly, raising awareness through education and training programmes tailored for MSMEs is crucial. Additionally, providing incentives like tax benefits or grants for adopting sustainable practices can motivate MSMEs. Collaborations with larger corporations and specialised sustainability firms can also help MSMEs access resources and expertise.”

Strategising for ESG

ESG factors have been found to be positively correlated with financial performance and attractiveness to investors, says Saunak Saha, partner, Climate Change and Sustainability Services at EY India. “Companies need to strategise well on value creation-linked metrics such as operating margins or return on invested capital for effectively managing costs of adopting ESG. This will further help companies gain access to climate finance instruments such as sustainability-linked loans and green bonds,” Saha adds.

Experts recommend a phased approach to ESG integration in businesses. In the initial phase, the target should be low-hanging fruits, like low-cost operations.

The next stage is of embedding sustainability in the business, which will require capital investment on account of upgrading technology, retrofitting machinery and making process changes.

Saha offers his checklist of key actions that business can focus on to overcome regulatory challenges and enhance their ESG preparedness. These points include conducting initial impact assessment on the eligible product portfolio, analysing regulatory requirements of the exporting country, setting up the process to collect data through artificial intelligence-linked interventions and machine learning tools, monitoring and managing compliance requirements within an organisation and continually improving its ESG performance.

“As businesses around the world are developing strategies to decarbonise their operations, country-level policies and regulation will play a key role in making the potential technologies more commercially viable for the industries to adopt,” says Saha.

The challenges for becoming ESG-compliant are numerous, but companies do not have the choice of ignoring them. Amid the growing acknowledgment of the importance of responsible economic growth, the demand for ESG compliance will only increase in the coming times. The earlier businesses accept it and find ways and means of embedding ESG parameters in their policies and practices, the better it is for them and the world.