Enhancing Business Responsibility of India Inc. Through ESG Disclosures

The global community is negotiating ways to manage climate change and mitigate its impact while ensuring that there is no adverse effect on employment, food security or the living standards of the masses. Addressing climate change is one of the most urgent tasks, particularly for a developing India, which is already bearing the harsh consequences like water shortages, extreme weather events such as floods, coastal erosion, droughts, rising temperatures, anarchical expansion of unregulated industrial growth and other climate affecting events.

On top of it, what is rarely spoken about is another silent killer – fast expansion of concretization, which by itself is a by-product of uncontrolled urbanisation due to the lackadaisical approach of civic agencies. India is decades away from its peak in terms of economic growth and energy consumption, but India’s energy demand is estimated to grow faster than any other country over the next few years. India, a developing country of more than 1.3 billion people, is the world’s third-largest emitter of carbon dioxide after the US and China.

In this background, speaking at the 26th United Nations Climate Change Conference, more commonly referred to as COP26, held in Glasgow in October – November 2021, our hon’ble Prime Minister, Sri. Narendra Modi made five key pledges for how India would decarbonise over the next few decades. He had pledged that India would reach net zero-emissions by 2070.  

 

Broadly, ESG stands for Environmental, Social, and Governance and refers to the three key factors when measuring the sustainability and ethical impact of an investment in any business or industry. The term “environmental” includes carbon emissions, air and water pollution, deforestation, green energy initiatives, waste management, and water usage. The term “social” includes employee gender and diversity, customer satisfaction, corporate sexual harassment policies, human rights at home and abroad, fair labour practices, etc. The term “’governance” includes data protection, privacy, security, transparency, business ethics/values, anti-corruption and anti-bribery policies.

The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate behaviour and to determine the future financial performance of companies.” Broadly, the term ESG refers to the examination of a company’s environmental, social, and governance practices, their impacts on the company’s performance, ability to execute its business strategy, create long-term value, and the company’s progress against benchmarks.  

In response to this need, there has been a greater emphasis among investors and stakeholders on businesses that are responsible and sustainable in terms of the environment and society. As such, reporting on a company’s performance on sustainability-related factors has become as vital as reporting on its financial and operational performance. Modern business organisations are now being motivated by more than just profit-oriented strategies and revenue-generating objectives. Sustainability has become an integral aspect of corporate branding and shareholder expectations. ESG, used interchangeably with sustainability based on quantitative or semi-quantitative data, is about pursuing responsible and ethical business practices with attention to social and environmental equity along with economic development. The term “sustainability” is broadly used to indicate programs, initiatives and actions aimed at the preservation of a particular resource. However, it also refers to four distinct areas: human, social, economic and environmental – known as the “four pillars of sustainability”.

The policies adopted by Indian regulators over the past years also indicate that India has made an aggressive move towards decarbonisation to adopt sustainable ways of doing business. India is one of the first countries to demand ‘ethical’ commitments from corporations and industries. In 2013, Corporate Social Responsibility was mandated in India within the Companies Act of 2013, as was suggested in the National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Business in 2011. The Companies Act, 2013 introduced one of the first ESG disclosure requirements for companies. Section 134(m) mandates companies to include a report by their Board of Directors on conservation of energy with their financial statements and is further detailed under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014, which mandates the board to provide information regarding conservation of energy.

 

SEBI’s Role in Mandating ESG Disclosures

 

There may not yet be any single, comprehensive and stringent enactment governing the entire subject with all checks and balances, but SEBI (Securities and Exchange Board of India) has taken on the role of implementing an efficient ESG policy. As far back in November 2015, SEBI issued a circular prescribing the format for the Business Responsibility Report (BRR) with respect to reporting on ESG parameters by listed entities. The top 500 listed companies in India were instructed by SEBI to disclose indicators of business responsibility and sustainability through Business Responsibility Reporting (BRR). Companies were mandated to include disclosures on opportunities, threats, risks, and concerns as part of their annual reports under Regulation 34(3) of the SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (LODR Regulations).

In 2017, SEBI issued a circular on ‘Disclosure Requirements for Issuance and Listing of Green Debt Securities’ (also known as Green Bonds) to introduce the regulatory framework for the issuance of green debt securities in India and enhance investor confidence. It supplements the SEBI (Issue and Listing of Debt Securities) Regulation, 2008 and envisages a list of disclosures that an issuer must make in its offer document before and after commencement of a project financed by green debt. These additional disclosure requirements have been prescribed to attract the finance reserved for ESG-compliant projects, such as renewable energy and sustainable energy, clean transportation, sustainable water management, climate change adaptation, energy efficiency, sustainable water management, sustainable land use and biodiversity conversion. 

To further strengthen the ESG disclosure regime in India, SEBI amended Regulation 34(2)(f) of the LODR Regulations and on May 10, 2021, SEBI issued another circular detailing new sustainability-related reporting requirements on ESG parameters called the Business Responsibility and Sustainability Report (BRSR) to replace the existing BRR and place India’s sustainability reporting on par with the global reporting standards. The BRSR is intended to have quantitative and standardized disclosures on ESG parameters. Such disclosures will be helpful for investors to make better investment decisions and also enable companies to engage more meaningfully with their stakeholders by encouraging them to look beyond financials and towards social and environmental impacts.

The filing of BRSR after the implementation of new norms has been stipulated as mandatory for the top 1000 listed companies (by market capitalization) for the financial year 2022-23 but voluntary for the financial year 2021-22, to provide the companies with sufficient time to get used to new reporting compliance/regulations. The BRSR seeks continuous disclosures from listed entities on their performance and is aligned with the nine principles of the ‘National Guidelines for Responsible Business Conduct’ (NGBRCs). Adoption of BRSR is yet to pick up pace because of the detailed nature of disclosures required in BRSR. To speed up the process, in a Press Release on May 6, 2022, SEBI constituted an advisory committee on ESG matters in the securities market to create faster momentum.

In respect of non-listed companies however, there is currently no law that mandates that such companies be subject to mandatory ESG disclosure or reporting requirements. However, it can be expected that once the scheme is fully implemented where it is comparatively easier to regulate, it will certainly cover other companies as well as industries in unorganised sectors.

ESG disclosures are highly significant and relevant for all prospective stakeholders involved in business for reasons briefly described as follows.

  • Investors – If a business is not conscious of sustainability, there are chances of it becoming redundant in the future due to legal and regulatory changes prohibiting certain ways of doing business or decreasing demand for business products or deteriorating services. This aspect would certainly motivate the investor’s focus while investing.
  • Businesses – ESG disclosures identify potential transition risks, assess future viability, and take the necessary steps to adapt to likely future changes. Companies that are not aware run the risk of losing profit-making capacity as well as market reputation.
  • Consumers – ESG disclosures also help conscious consumers identify responsible businesses that not only concentrate on profit maximisation but also growth in a responsible manner. Accordingly, the disclosures become part of a marketing strategy to attract more consumers.

ESG goals are a set of standards for a company’s operations that force companies to follow better governance, ethical practices, environment-friendly measures, and social responsibility. They are used by socially conscious investors to screen potential investments. Environmental criteria consider, for example, how a company performs as a steward of nature, safeguards the environment, including corporate policies addressing climate change. Companies with better ESG performance have a better track record on issues such as human rights, climate change, environmental sustainability, social responsibility, ethics, and transparency, and hence are more resilient against future risks. It has become absolutely essential for companies to have comprehensive ESG policies in place.

In conclusion, to quote our Hon’ble Prime Minister, “The decisions taken in Glasgow will safeguard the future of generations to come and give them a safe and prosperous life.”  

The policies adopted by Indian regulators over the past years also indicate that India has made an aggressive move towards decarbonisation to adopt sustainable ways of doing business. India is one of the first countries to demand ‘ethical’ commitments from corporations and industries. 

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The Metaverse and its Numerous Concerns

There is a lot of buzz being generated around the “Metaverse,” which can be defined as a virtual reality-based shared digital world in which users (through their “avatars”) can enjoy three-dimensional, multi-sensory experiences. This rapidly-evolving, technology-driven paradigm is a huge shift away from the present, where digital interactions are based on text, audio and two-dimensional images/videos. The excitement around the Metaverse is due to the immense possibilities that exist around how it can be used for social interactions, commerce, media & entertainment, education, manufacturing, healthcare, defense etc. Not surprisingly, many companies, even in India, are investing in Metaverse capabilities.

While the potential for metaverse cannot be denied, it is just as important to recognize and acknowledge that there are several grey areas around this paradigm. If timely actions to prevent the misuse of the metaverse are not taken by the global community, we run the serious risk of opening a new Pandora’s Box. And once the proverbial genie is released from the bottle, it is virtually impossible (pun intended) to put it back inside.

The Potential Dangers of the Metaverse

 
What are the biggest fears surrounding the Metaverse? Concerns have been expressed from different quarters around issues relating to the privacy, safety and well-being of people who are active in the metaverse. In the current scenario, people use social platforms to connect with each other. If someone with whom I do not wish to engage seeks to connect with me in a basic digital world, I can easily deny the friend request. Even after having granted them permission initially, I can choose to block such persons. During the time they have permission to engage with me, the worst that can happen is that they send unwanted texts, audio messages or images and videos.

This is bad enough, but in the metaverse, the kind and nature of obscene or harmful content will change drastically; consequently, so will the impact of such material and experiences on vulnerable segments of society. 

For example, in the metaverse, it is quite possible for complete strangers to enter someone else’s personal space – without the latter being aware of who the former is. Given the multi-sensory capabilities of the metaverse, which includes haptic technology (the sense of touch), the experience and impact can be far worse. Arguably, the metaverse (as it exists currently) lends itself more easily to bullying, sexual abuse or intimidation. Indeed, there have been recent media reports that some VR-based games that are accessible to young children contain inappropriate content. 

AI-driven deep fakes can further muddy the waters by creating and distributing patently false content that is almost impossible to detect as fake. There is enough fake information circulating on Whatsapp as it is, think of the danger of content that purportedly shows politicians or others saying things designed to inflame emotions.

NFTs will be key to the evolution and growth of the metaverse, providing owners of physical assets such as paintings and IPR such as rights to music, movies etc. new avenues to monetize them at scale. Cryptocurrencies and tokens are likely to form the principal currency in the metaverse, powering commerce and payments. As of now, cryptocurrencies are anonymous and independent of mainstream banking and financial systems. 

In the absence of regulations that are uniformly enforced globally, such parallel payment systems can be easily misused for illegal and immoral activities and transactions, including child sexual abuse. It is likely that fraud and crimes will increasingly crisscross between the current digital world and the metaverse (and perhaps the physical world), making them harder to detect and bring the perpetrators to book.

Addressing the Issues Surrounding Metaverse 

 

A multipronged approach is key to addressing the potential dangers of the metaverse. It is vital to frame appropriate legislation and arm various regulatory agencies with the power to catch and punish violators is vital. The basic premise around legislation has to be this: if something is illegal or against the law or generally accepted social mores in the “real”, physical world, it must be treated the same way in any parallel “virtual reality” based universe.

However, legislation alone cannot secure the metaverse. It will be essential to hold creators of content and platforms that enable distribution and access responsible for violations. The metaverse infrastructure needs to be designed with more intent to put in place appropriate safety mechanisms right at the beginning. As a global society, we must learn from our experiences with the downsides of social media platforms (false information, cyber-bullying, digital fraud etc.) and take preemptive actions that can prevent problems before they become common. This is significant because changing processes after people have grown accustomed to them is never easy; also, some damage may have already occurred. It may also be necessary to think of ways to incentivize good behaviour in the metaverse.

The metaverse is expected to surge ahead quickly on its evolutionary path. Its trajectory cannot be predicted in advance, therefore, what is needed is constant vigilance and for global action to be taken in a concerted manner. The UN system is supposed to be the primary keeper of international order. A number of events over the past couple of decades have painfully driven home the point that the UN architecture needs an urgent and major overhaul. As part of this exercise, it may be useful to establish a new global body tasked with the responsibility of overseeing and governing the metaverse. Regional political/economic blocs must be encouraged to ensure that their members comply with rules and regulations related to the metaverse.

Image Credits: Photo by Click on 👍🏼👍🏼, consider ☕ Thank you! 🤗 from Pixabay 

The metaverse is expected to surge ahead quickly on its evolutionary path. Its trajectory cannot be predicted in advance; therefore, what is needed is constant vigilance and for global action to be taken in a concerted manner.

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Why Businesses Should Focus on ESG?

The world has changed in many fundamental ways especially in the last 25 years. I am not referring to technology-led transformation or geopolitical shifts, this piece is about Environmental, Social and Governance criteria – collectively referred to as “ESG”.

Environmental Criteria

 

Environmental costs, which were for long viewed by economists as “externalities”, are now an important consideration in decision-making by governments and business leaders. Given the devastating effects of widespread environmental degradation and climate change, countries around the world are taking concrete actions to limit further damage; many are setting “net zero” emission targets for individual sectors over the next couple of decades. As a result, new legislations are being enacted that require businesses to act in certain ways and desist from other kinds of actions. Arguably, this is the biggest facet of change globally.

Social Criteria

 

The second area of change is that various forms of social injustice are no longer being tolerated. While there were always rules against such inequities, there is now a greater cost imposed on organizations that violate these rules- not just by governments and regulators, but also by consumers, who choose to shift loyalties towards brands that exhibit greater sensitivity to social causes. By definition, social injustice covers a broad range of issues that includes exploitation of children, women or certain races (e.g., the Uighurs); not providing employees good working conditions (physical environment, denying employees time for bio-breaks and rest, harassment at the workplace etc.); discrimination against people with disabilities, gender, age or marital status; even selling goods that are not safe or bad for health arguably fall under this category.

Governance Criteria

 

The thrust on “governance” is the third major driver of change. It is not as if rules and regulations did not previously exist to prevent breakdowns in governance. Yet, there are a number of examples from around the world that showcase bad governance: from companies in South Korea, Japan, the USA and Europe to the ongoing matters at the NSE and BharatPe in India.

 

Why ESG Adoption is Crucial?

 

In recent years, various members of business ecosystems worldwide, including enterprises, investors, regulators and the general public have become far more aware of the importance of compliance with “ESG” norms and standards. They are much less willing to tolerate breaches in an organization’s “ESG” conduct.

At one level, companies that do not do well on “ESG” parameters are more likely to face explicit financial penalties (e.g., carbon taxes). But just as important are the hidden costs that will increasingly need to be borne by ESG laggards. Perhaps the most important is the reduced access to capital because both banks and PE/VC firms are incorporating ESG criteria into their funding/ portfolio strategies.

On the demand side, many consumers (especially from the younger generations) are more conscious of brands that fare better in terms of their commitment to ESG and this, in turn, shapes their purchase decisions. Brands can quickly lose market share if they do not raise their ESG game.

As shown in the chart below, data over the past decade reveals that companies that have successfully implemented ESG strategies have consistently performed better than other global companies that have not paid as much attention to ESG.

 

Source: Stoxx.com quoted in https://sphera.com/spark/the-importance-of-esg-strategy/

This out-performance can be attributed to a combination of factors, including faster top-line growth, sustained cost reductions, higher employee productivity and reduced employee attrition and of course, fewer instances of fines/penalties for non-compliance. Investment decisions and technology choices that are guided by ESG considerations will drive a more efficient allocation of capital; in turn, this will boost ROCE (Return on Capital Employed).

While it is convenient to look at the three strands of ESG separately, in reality, they are closely intertwined. The sooner business leaders acknowledge that ESG is not a fad or a feel-good factor, but in fact, makes sound business sense, the better it is for the world as a whole.

 

Start Your ESG Journey Right Away

 
Someone quipped that the best time to plant more trees was years ago, but the second-best time is now! It’s not too late for you to begin your ESG transformation. But make sure you do it as a well-structured program, and not merely a hotch-potch of initiatives that have no clear owners, goals or measures and therefore cannot be sustained.

 

To report ESG performance, you can take the help of commonly used frameworks such as the following:

  • UN Sustainable Development Goals (SDGs)
  • Global Reporting Initiative (GRI)
  • Sustainability Accounting Standards Board (SASB)
  • Climate Disclosure Standards Board (CDSB)
  • Task Force on Climate-related Financial Disclosures (TCFD)

Image Credits: Photo by Photo Boards on Unsplash

While it is convenient to look at the three strands of ESG separately, in reality, they are closely intertwined. The sooner business leaders acknowledge that ESG is not a fad or a feel-good factor, but in fact, makes sound business sense, the better it is for the world as a whole.

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