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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Unshackling the Education Sector - A Surefire Way to Accelerate Development

“Education is the most powerful weapon which you can use to change the world”, said former South African President Nelson Mandela. I believe his prescient observation is timeless in its relevance. In the world that we live in, there are two major factors that will shape how education will be consumed in the future. The first is the reality of ever-increasing digitization. The second is the huge changes to lifestyles forced upon us in the wake of the COVID-19 pandemic.  

In many ways, these two are closely intertwined in the context of education. We as a nation today stand on the threshold of a historic opportunity to transform our education system. The New Education Policy has set the ball rolling, but much more needs to be done to enable our institutions to deliver the kind of education that our nation needs. This is especially true for higher education. We have hundreds of universities and higher education institutions (HEIs) that cater to the entire gamut of academic fields. But the fact that even the best of our HEIs do not rank among the top 100 globally is telling. By comparison, several Chinese universities do- and have got there only in the past decade.  

Innovations around the world, powered by digital technologies, are enabling better remote teaching and learning experiences. In India, mobile/internet penetration is increasing rapidly and becoming ever more affordable. Together, these are powerful forces of change. For many courses, virtual classes can easily be conducted by teachers from their homes- provided they are equipped with the right digital infrastructure. Students too can attend these classes from the comfort of their homes. Of course, for certain courses such as Medicine, Engineering, Agriculture, etc. it may not be possible to fully replicate the experience of a laboratory or a field- although I think sooner rather than later, Augmented Reality will enable even this gap to be bridged. This means that unlike in the past, universities and HEIs no longer need large areas of land to build physical classrooms or other on-campus facilities. 

Given India’s legacy of teaching in English and the relatively lower fees and costs of living, our universities have, for the past many decades, attracted students from Africa and Middle Eastern countries who pursue various undergraduate and post-graduate degrees. To be fair, some of this is also the result of “education diplomacy”. Why not take advantage of this and work towards making India the education hub of the world for the new era? Given India’s own linguistic diversity and the needs of foreign students, multilingual support too can be provided digitally, to improve learning outcomes and hence increase the attractiveness of our HEIs.  

We have the talent to develop the right curricula and teaching methods. Just a few weeks back, Ranjit Disale, a government school teacher from Maharashtra won the Global Teacher Prize for his revolutionary contributions to the education of girls by leveraging QR code technology. There must be hundreds of other teachers in our HEIs with innovative ideas on how to enhance learning efficacy in their subjects.  

If asset-light, “virtual-only”, for-profit HEIs are permitted, private capital will more legally and transparently be attracted to the education sector. Investors such as PE funds will be more willing to fund the development of next-generation technology-based delivery infrastructure, hiring quality teachers, and development of new, digitally deliverable content that enables students to develop core knowledge as well as critical thinking skills and gain exposure to emerging fields that will become more and more important for India and the world. These knowledge assets can be used to scale up the education venture, thus lowering the risk for capital providers.  

 

Allowing asset-light virtual universities to be established in specific disciplines will also address the challenge of a shortage of qualified and motivated faculty. By allowing faculty to teach courses on multiple platforms, even students affiliated with different HEIs can get access to top-notch teaching. Digital content can be updated more easily, without the costs associated with printing, distributing, and updating physical textbooks. 

Naturally, such a massive transformation will need a radical change in the mindset of parents, teachers, and students. It will also need changes to the laws that govern the country’s education sector. Under India’s Constitution, education was originally a State subject. In 1976, the 42nd Amendment transferred some aspects to the Concurrent list. Visionary state governments can take the lead in amending the necessary regulations or enacting new legislation so that the education sector is able to attract adequate capital and has the ability to innovate around new courses, curricula, delivery models, testing mechanisms, etc.  

The pre-condition that Universities/HEIs can only be permitted when those who wish to set up such institutions have adequate land available is a major structural impediment. This is especially true for courses where there is no need for laboratories or hospitals etc. Per prevailing law, even private education institutions in India are supposed to be “non-profit”. But the reality is very different- and this is what breeds corruption. Trusts are set up to acquire large land banks on the outskirts of cities ostensibly to establish a school or college/university campus. The funds used to acquire these large tracts of land sometimes have questionable provenance. If the HEI clicks, well and good. If the institution does not gather the desired traction, that’s no big deal either. Over a period of time, these land banks are used for commercial or residential projects.  

In cities that have grown rapidly in the last decade or two (Bangalore is an example), educational institutions whose campuses were established say 20 years ago, are now located in the middle of the metropolitan area. These institutions shift to new areas on the outskirts. The prime real estate thus freed up in the city centre is used for other projects. In some cases, developers build a school as part of a large gated community, thus seeking to satisfy the conditions of land grant or conversion.  

Such new-age virtual universities can benefit students from India as well as overseas and allow underprivileged students to access high-quality education. Even in the current setup, there are several examples of talent from underprivileged backgrounds coming up with innovative ideas. Imagine what might be unleashed when virtual universities are able to channelize the creative energies of millions more of the world’s youth!  

 

Image Credits: Photo by Mohammad Shahhosseini on Unsplash

Even in the current set-up, there are several examples of talent from underprivileged backgrounds coming up with innovative ideas. Imagine what might be unleashed when virtual universities are able to channelize the creative energies of millions more of the world’s youth!  

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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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