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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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Atmanirbhar Bharat needs to harness the right strengths through a New Governance Architecture

Achieving the goal of an Atmanirbhar Bharat depends on two other factors in addition to the need for changes to various laws and a mindset change in our people (which I have written about in my two previous blogs). The first is harnessing India’s diversity in terms of natural and human resources and our rich civilizational traditions that, in many ways, are becoming relevant again. The second is to strengthen India’s federal governance structures in order to enable the first. 

India as a nation has abundant mineral wealth, that, if tapped sensibly, will secure critical supplies to vital industries. Developing our own local sources reduces the dependence on imports, thereby partially insulating our economy from a range of geopolitical and other risks. India’s wide variety of soil types and climatic conditions are capable of supporting a range of food crops as well as cash crops. Our country’s rich biodiversity endows us with a number of indigenous plant and animal species. Many plants that are native to India have proven medicinal value. Plant extracts like saffron are in great demand worldwide, and through proper scientific cultivation, can be grown in more areas.  

Almost every state is home to some traditional art or craft, whether textiles, dyes, toys etc. As the world becomes more conscious of the need to act against climate change and protect the planet, there will be a demand for green, sustainable products. Bamboo toothbrushes and bottles are a good example. Several north-eastern states can grow enough bamboo to make such products- not just for India but also for exports. A similar opportunity exists with Indian fabrics made of say tussar silk or fine cotton or pashmina yarn.  

The concept of Atmanirbhar Bharat is not about becoming an insulated island in a global economy; it is about optimizing self-reliance. Even in the future, we as a nation will continue to import a wide range of products and services simply because we do not have the comparative advantage to make them: it is cheaper to import them. But in the years ahead, we must minimize this list of imports so that there is minimum strategic dependence on key materials, whether natural resources or other components and intermediates.  

India has a strong base of human resources skilled in STEM disciplines. But many of our graduates who are keen on the research end up doing cutting-edge work in overseas labs. Why can we not create a domestic ecosystem that enables our scientists, engineers, and technologists to conduct similar levels of advanced research in India and allow domestic companies to commercialize the research to create products and services for the world? The new education policy is a step in the right direction, but more needs to be done to unshackle higher education and encourage private R&D and innovation in key fields. In fact, public-private partnerships in R&D can be quite fruitful.  

In my view, it is possible to do all this, but to do so with impact and in a sustainable manner, we need to rejuvenate our governance structures. The founding fathers of India envisioned a strong federal structure where central and state governments will work symbiotically and in complementary ways towards the overall purpose of India’s progress. For a number of reasons, this intent of our federal government system has weakened over time. The tendency of central and state governments to often lock horns (unless the same political dispensation is in power) needlessly wastes valuable time and other scarce resources. In most states, continuity of policies does not depend on their merit or impact; very often, policies introduced by one party’s government are decried and rolled back or tweaked when another party comes to power. This is not right, because every government implements some good policies for sure. Irrespective of which political party is in power, the central government and state governments should work in harmony.  

While the central government policies must aim to create a national-level competitive advantage for various sectors (through the right policies), state governments should work towards giving a thrust to industries that are important to India and can thrive locally within their jurisdictions. individual states must learn to utilize the legislative flexibility given to them under our constitution to make themselves most attractive to investors. This will necessarily mean that states will need to compete with one another, but that’s the only way they can accelerate social and economic development. Pegatron, one of Apple’s key OEM manufacturers, recently announced its intent to set up a production facility in India. I read a recent news report that both Karnataka and Tamil Nadu are offering incentives to get Pegatron to choose a location in their state. Similarly, UP has announced a policy to attract new data centres that come up.  

It is not that states are not doing this. But I do not think they are doing it well enough. Often, states compete on the basis of tax breaks or land at lower prices or single-window clearances, etc. But the business case of investing companies typically considers many more factors beyond just the ease of setting up a factory. While this criterion is undoubtedly important, depending on the nature of business, natural resource availability, availability of skilled human resources and infrastructure (power, water, multimodal transport options etc.) are also important considerations. The quality of housing, school/college education facilities, entertainment avenues, lung space, pollution levels, overall law and order situation etc. are also critical elements of the business case because these factors collectively go a long way in determining whether companies can attract top-quality talent, the levels of compensation needed and how easy it will be to retain staff.  

Also, some of these incentives can easily become a slippery slope because smart investors will start playing one state against another. For states to develop a stronger and more comprehensive “pull” factor, the quality of their policies and the degree of innovativeness they show will be key. This means that officers who understand the big picture will inherently be more flexible and responsive to the needs of investors, provided they are not impeded by political pressures of various kinds. States whose leadership consciously works towards quickly creating such a development-oriented culture within government will undoubtedly benefit much more than those states that continue to operate in the old way.  

In the context of the preceding analysis, I see three distinct clusters of sectors where we as a nation should focus in the next five years to create a global scale: 

  • those in which we have become strong global players in the past 20 years (pharmaceuticals, chemicals, steel, IT, automotive, textiles etc.)- we can build on our advantages. 
  • those that are part of our ancient tradition, but are finding new takers worldwide (Ayurveda and other ancient systems of medicine, yoga, environmentally-friendly dyes, weaving etc.)- we can leverage our rich tradition and present them in a modern context using better manufacturing, packaging and branding.   
  • those that are emerging as the new arenas of global competition (space and satellite technologies, remote sensing, AI-ML, robotics, 5G, IoT, cognitive computing, genomics, biotechnology etc.)- this is where we can harness the diversity in our human resources to emerge as leaders in what will essentially be the key fields of the future.  

Higher Education, in my view, is another large opportunity that India can benefit from. The pandemic has proved that with the right technology, virtual teaching and learning are possible. Naturally, the right teacher, training and content, along with further advances in technology, will help raise effectiveness further. With this in mind, allowing virtual universities to be established in various disciplines will help students from India and outside get access to a top-notch education. Of course, this will need a radical change in the laws that govern education.  

A sustainable Atmanirbhar Bharat depends not just on a large and growing vibrant domestic market, but also on our ability to become an export hub that caters to global demand by producing top quality products and delivering cutting-edge services (including education). This is the only way we can build a robust economy that not only delivers the levels of employment and GDP growth but is also better prepared to cope with shocks and slowdowns that may occur in the future. After all, there’s a good reason why twin-engine aircraft is preferred, why world-class batsmen can play both on the front- and back foot, why archers have a second string to their bows or indeed, why it is recommended that we should not put all our eggs in one basket. 

Image Credits: Photo by Balaji Malliswamy on Unsplash 

A sustainable Atmanirbhar Bharat depends not just on a large and growing vibrant domestic market, but also on our ability to become an export hub that caters to global demand by producing top quality products and delivering cutting-edge services (including education). This is the only way we can build a robust economy that not only delivers the levels of employment and GDP growth but is also better prepared to cope with shocks and slowdowns that may occur in the future.

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Food Safety Compliance System (FOSCOS) - A game-changer for Food laws Compliance and Enforcement Mechanism

With increased awareness, globalization and technological advancement, people are becoming more and more conscious of their eating choices. In fact, COVID-19 has changed the food habits of many individuals eager to fight against the pandemic by adopting a more balanced and nutritious diet to improve immunity.

Accordingly, Indian Food laws are changing in line with global food laws/standards through the amendment of various regulations based on the changing scenario. Food Safety Standard Act, 2006 (“the Act”) is also evolving and transforming in consonance with the “One Nation One Food Law” initiative.

 

The Food Safety and Standards Authority of India (FSSAI) established under the Act is now not only responsible for monitoring food safety standards but is also governing the entire food supply chain. With this mandate, the FSSAI has taken various steps towards easing the process of registration and licensing.

 

A new step in that direction is the replacement of the present online application system i.e. Food Licensing and Registration System (FLRS) to provide licensing and registration with an upgraded, advanced, controlled, improved, and developed open-source platform called Food Safety Compliance System (FoSCoS).

 

It was initially launched in the States/UTs of Tamil Nadu, Puducherry, Gujarat, Goa, Odisha, Manipur, Delhi, Chandigarh, and Ladakh in June 2020. FSSAI is now launching the second phase of FoSCoS in the remaining 27 States/UTs on 01st November 2020. Consequently, the FLRS portal has been closed w.e.f. 21st October 2020. FoSCoS is a more user-friendly and effective IT platform that seeks to connect Food Business Operators (FBOs), Designated Officers (DOs), and Food Safety Officer (FSOs).

 

FoSCoS is an upgraded and comprehensive solution that also connects with FSSAI’s other existing IT platforms such as Food Safety Compliance through Regular Inspection and Sampling (FoSCoRIS), Food Safety Connect-Complaints Management System, Online Annual Return Platform, Food Import Clearing System (FICS), Indian Food Laboratory Network (InFoLNet), Audit Management System (AMS), Food Safety Training and Certification (FoSTaC), Food Safety Mitra (FSM), etc.

 

FoSCoS has been rolled out to achieve the following objectives:  

 

  • Transform from the present FLRS which is only a licensing platform to a central food safety compliance regulatory platform.
  • Facilitate a hassle-free and user-friendly IT platform to connect Food Business Operators and Food authorities.
  • Build a technically advanced integrated application to achieve interoperability with other applications, capable of higher user traffic, and has potential for future upgrades and functionalities.
  • Enhance user performance of the application and make the application process simpler and efficient to promote ease of doing business amongst FBOs.
  • Achieve minimal physical documentation and streamline business process flows for FBOs for online applications.
  • Achieve and enable the application to have a standardized product approach rather than a text box approach for manufacturers.
  • Enable the application to seed business-specific details such as CIN No., PAN No. and GST No. to ensure effective profiling and validation of FBOs.

 

The FSSAI expects FoSCoS to be a game-changer for the implementation and enforcement of food laws in India. It is necessary to create awareness among Food Business Operators and the general public to achieve the goal of the Swastha Bharath Mission.

 

 

 

 

Fox Mandal is planning to publish a series of articles/blogs to create awareness on the food laws in India and related compliance under the FoSCoS Platform.

 

 

Image Credits: Photo by Mat Brown from Pexels

The FSSAI expects FoSCoS to be a game-changer for the implementation and enforcement of food laws in India. It is necessary to create awareness among Food Business Operators and the general public to achieve the goal of the Swastha Bharath Mission.

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