Growing Importance of ESG in Business Strategy

Introduction

In today’s rapidly evolving business landscape, investors and stakeholders are not only focused on profits but also prioritising the environmental and social impact of businesses before making investment decisions. This growing awareness underscores the critical importance of sustainability, empowerment, and responsibility alongside profitability.

Environmental, Social, and Governance (ESG) has emerged as a critical framework for evaluating an organization’s sustainability and societal impact. Beyond being a compliance metric, ESG has become a strategic priority for companies worldwide, influencing investment decisions, operational strategies, and corporate reputations. With climate change, social inequalities, and governance failures under the spotlight, ESG is no longer a choice but an imperative—a truly omnipresent concept reshaping the global corporate landscape.

This article provides readers with a foundational understanding of the historical background of ESG, its practices across various countries, and the development phases of ESG implementation in India.

Historical Background

The journey toward Environmental Social Governance (ESG) has been marked by a significant evolution over the years, transitioning from a focus on Profit to Governance, then to CSR, and finally to ESG. This decades-long transformation has led stakeholders to recognise that profitability alone is insufficient for ensuring long-term sustainability. Alongside financial success, fostering societal development and protecting the environment are crucial to preserving resources and opportunities for future generations.

In 1987, the World Commission on Environment and Development (WCED) published the Brundtland Report, formally titled Our Common Future. This landmark document introduced the concept of “sustainable development,” defined as:

“Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

The report identified two key drivers of global environmental challenges: severe poverty in the Global South and unsustainable consumption and production patterns in the Global North. It called for a unified strategy to align development goals with environmental preservation.

First Socially Responsible Investment (SRI) Index was established in May 1990 by Domini Social Index. It is the first index which enabled investor to add other integral factors i.e., social, and environmental in additional to financial benefits into their investment decisions. The index with include a pool of companies with strong foundation in areas such as employee relations, product safety, and corporate governance while excluding those involved in sectors like alcohol, tobacco, firearms, gambling, nuclear power, adult entertainment, and military weapons.

The term “Environmental, Social, and Governance” (ESG) was firstly coined in 2004 in the UN Global Compact published report, Who Cares Wins. The report explicitly states that members were advised to refrain from using terms like “sustainability” or “corporate citizenship” to avoid potential misunderstandings arising from varying interpretations of these terms. The focus was on explicitly addressing environmental, social, and governance (ESG) issues, which are the core topics of the report.

Until 2004, the industry has yet to develop a unified approach to effectively integrating ESG aspects into asset management, securities brokerage services, and related buy- side and sell-side research functions.

The report emphasizes issues which have or could have a material impact on investment value. It adopts a broader definition of materiality than is traditionally used, incorporating longer time horizons (10 years or more) and intangible factors that affect a company’s value. Under this expanded definition, aspects related to widely accepted principles and ethical guidelines, such as the universal principles underlying the Global Compact, can significantly influence investment value.

We have outlined the global ESG development timeline below to provide an overview of the key events that contributed to the integration of the ESG concept into the business world.

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Development Phase in India

Eleventh Five-Year Plan (2007–2012) Volume I: Inclusive Growth: The term “ESG” (Environmental, Social, and Governance) is the new buzzword in India. However, its seeds were sown as far back as 2007, when NITI Aayog introduced the Eleventh Five-Year Plan (2007–2012) Volume I: Inclusive Growth. For the first time, the focus shifted beyond profit to emphasize inclusive growth.

According to Eleventh Plan Report, the economy was growing, a significant portion of the population still lacks basic human need to maintain a decent living i.e., basic health, education, nutrition, clean water, sanitation etc. The Eleventh Plan seeks to address these deficiencies by accelerating the pace of growth while ensuring it becomes more inclusive. The objective of inclusiveness extends to non-monetary areas, focusing on: (i) income and poverty, (ii) education, (iii) health, (iv) women and children, (v) infrastructure, and (vi) environment.

Corporate Social Responsibility Voluntary Guidelines 2009: Indian entrepreneurs and business enterprises have an inherent ethical value system and a civilized culture that emphasizes caring for their surroundings. Earlier, they acted as philanthropists. However, the need for inclusiveness in society, while conducting business, created a requirement for rules and guidelines to assist Indian entrepreneurs and business enterprises in fulfilling their corporate responsibilities.

The Ministry of Corporate Affairs introduced the Corporate Social Responsibility Voluntary Guidelines 2009 to help Indian entrepreneurs and business enterprises formulate a CSR policy. These guidelines cover core elements such as: Care for all Stakeholders, Ethical functioning, Workers’ Rights and Welfare, Human Rights, Environment, and Social and Inclusive Development.

National Voluntary Guidelines (NVGs) on Social, Environmental & Economic Responsibility of Business 2011: This guideline is an upgraded version of the Corporate Social Responsibility Voluntary Guidelines 2009. Considering the inputs received from stakeholders across the country, appropriate changes have been incorporated. The guidelines, therefore, represent a consolidated perspective of key stakeholders in India and lay down the fundamental requirements for businesses to operate responsibly. This ensures a holistic and inclusive approach to economic growth.

It urges businesses to embrace the “triple bottom-line” approach whereby its financial performance can be harmonised with the expectations of society, environment, and the many stakeholders it interfaces with in a sustainable manner. The Guidelines are structured around nine (9) principles, each supported by core elements that bring these principles to life. These core elements offer practical steps for businesses to effectively implement the principles such as:

Principle 1: Businesses should conduct and govern themselves with ethics, transparency and accountability;

Principle 2: Businesses should provide goods and services that are safe and contribute to sustainability throughout their life cycle;

Principle 3: Businesses should promote the wellbeing of all employees;

Principle 4: Businesses should respect the interests of, and be responsive towards all stakeholders, especially those who are disadvantaged, vulnerable and marginalised;

Principle 5: Businesses should respect and promote human rights;

Principle 6: Businesses should respect, protect, and make efforts to restore the environment;

Principle 7: Businesses, when engaged in influencing public and regulatory policy, should do so in a responsible manner;

Principle 8: Businesses should support inclusive growth and equitable development;

Principle 9: Businesses should engage with and provide value to their customers and consumers in a responsible manner.

Business Responsibilities Reporting 2012: In the interest of greater public disclosure on Environmental, Social, and Governance (ESG) compliance, and in alignment with the extension of the National Voluntary Guidelines (NVGs) on Social, Environmental & Economic Responsibilities of Business 2011, the Securities and Exchange Board of India (SEBI) issued a circular on 13.08.2012.

This circular mandated the inclusion of a Business Responsibility Report (BRR) in the annual reports of the top 100 listed entities based on market capitalization at BSE and NSE as of March 31, 2012. Other listed entities were encouraged to voluntarily disclose BRRs as part of their annual reports.

Listed entities is require to submit the Report in the format prescribed by the SEBI through circulars. The suggested format will cover the basic information of the company and compliance of the 9 principals issued by the National Voluntary Guidelines (NVGs) on Social, Environmental & Economic Responsibilities of Business 2011.

Corporate Social Responsibility: Corporate Social Responsibility (CSR) is the first mandatory requirement aimed at addressing the interests of all stakeholders while conducting business. Before CSR, all guidelines and circulars were either followed on a voluntary basis or made mandatory only for large business houses in India.

The Companies Act, 2013, prescribes the eligibility criteria, the formulation of a CSR policy, the composition of the CSR committee, the quantum of contribution, and the areas where CSR contributions are required to be made.

Eligibility Criteria: Every Company having Net Worth of Rs. 500 Crore or more or Turnover of Rs. 1,000 Crore or more or Net Profit of Rs. 5 Crore or more in the preceding financial year the company is require to contribute 2% of average net profit of the immediately preceding three financial years.

CSR Policy: The Board is required to formulate a CSR policy for the company based on the recommendations of the CSR Committee and must display the contents of such policy in its report and on the company’s website, if available.

CSR Committee: While utilising the CSR obligation, the company is required to give preference to local areas. Furthermore, the company must establish a CSR Committee consisting of three directors, one of whom should be an independent director. In cases where the appointment of an independent director is not applicable to the company, the composition of the committee should include two or more directors. In case the expenditure on CSR activities does not exceed Rs. 50 lakhs, the requirement to constitute a CSR Committee is not applicable. In such cases, the Board of Directors of the company will perform the functions of the CSR Committee.

Business Responsibility & Sustainability Reporting: Over a period of time stakeholders globally have been evolving, with a major concern arising regarding the impact of climate change, inclusive growth, and the transition to a sustainable economy. Stakeholders and investors are urging businesses to focus more on acting responsibly and sustainably towards the environment and society. The reporting of the performance of the company on sustainability related factors vis-à-vis financial and operational factors.

SEBI issued a circular dated November 4, 2015, prescribing the format for the Business Responsibility Report (BRR) for reporting on ESG (Environmental, Social, and Governance) parameters by listed entities. This format was further amended by SEBI through a notification dated May 5, 2021, to introduce new reporting requirements on ESG parameters, called the Business Responsibility and Sustainability Report (BRSR). The BRR will be replaced by the BRSR, effective from the financial year 2022-23, and filing will be mandatory for the top 1000 listed companies (by market capitalization). Filing of the BRSR was voluntary for the financial year 2021-22.

The BRSR seeks disclosures from listed entities on their performance against the nine principles of the ‘National Guidelines on Responsible Business Conduct’ (NGBRCs) and reporting under each principle is divided into essential and leadership indicators. The essential indicators are required to be reported on a mandatory basis while the reporting of leadership indicators is on a voluntary basis. Listed entities should endeavor to report the leadership indictors also.

The BRSR is intended towards having quantitative and standardized disclosures on ESG parameters to enable comparability across companies, sectors, and time. Such disclosures will be helpful for investors to make better investment decisions.

Conclusion

Far from being a mere corporate buzzword, ESG has grown to define responsible business conduct. With environmental crises worsening, social inequalities widening and scandals involving governance revealing themselves, the pressure on businesses to comply with ESG principles has never been more seemingly everywhere.

India commitment to ESG has been strong, given its unique socio-economic dynamics. But its journey is far from over. India needs to overcome these challenges, bring together its stakeholders, and harness technology towards data transparency to emerge as a global leader in sustainable development.

The ESG wave is not a passing trend, it will stick around and mold the world for companies, investors, and societies as well. No longer is it a matter of “if” companies should walk the walk of ESG; it is a question of “how fast” they can adapt to this to this omnipresent paradigm.

References:

1. https://en.wikipedia.org/wiki/Environmental,_social,_and_governance#:~:text

=Environmental%2C%20social%2C%20and%20governance%20(,more%20proa ctive%20cases%2C%20impact%20investing.

2. https://icsi.edu/media/webmodules/Academics/ENVIRONMENTAL_SOCIAL_AND_GOVERNANCE_ESG_PRINCIPLES_PRACTICE.pdf

3. Our Common Future (Brundtland Report) (PDF, 1 MB, 03.1987)

4. https://www.todayesg.com/origin-of-esg-global-compact-who-cares-wins/

3. The Global Compact_ Who Cares Wins

4. https://www.csr.gov.in/content/csr/global/master/home/aboutcsr/history.ht

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Ms. Anita Chaudhary ACS, M. Com (BPCG) is the Founder and Managing Partner of Chaudhary & Negi Partners (Company Secretaries). Contact: [email protected], Mob: +91-93557-42555.

Mr. Aashish Negi FCS, LLB, B. Com, CSR Certified Professional is the Co-Founder and Managing Partner of Chaudhary & Negi Partners. Contact: [email protected], Mob: +91-93557-41555/43555.