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WHAT IS ESG?

ESG stands for Environment, Social and Governance. It is a framework consisting of factors for screening and assessing the efforts made by companies toward addressing ESG issues and creating sustainability for stakeholders and not only shareholders. It is a great way of measuring impact of company’s activities on environment, society and its governance mechanisms.

Following are the 3 pillars of ESG framework

♦ ENVIRONMENT

It focuses on impact of company’s activities on environment and its risk management practices. Its aim is to conserve natural world. It includes-

  • Climate change and carbon emissions i.e., Net zero
  • Air and water pollution
  • Biodiversity
  • Deforestation
  • Energy efficiency
  • Water and natural resources scarcity
  • Waste management
  • Compliance with environment regulations

For instance, “In famous case of Plachimada in the southern state of Kerala, Coca-Cola’s plant was forced to close down in March 2004 after the village council refused to renew the company’s license, on the grounds that it had over-used and contaminated local water resources causing increased drought possibility.” (waronwant.org,2007)

What is Net Zero?

Net-Zero is a climate outcome where greenhouse gases emitted into the atmosphere are balanced by removal in equal amounts. So, the net effect is global temperature remains unchanged.

One can consider achieving net zero by either drastically cutting emissions or offsetting emissions by removing greenhouse gases. Net-zero is an aspect of environment factor of ESG.

“At COP26 (26th conference of parties), Prime Minister Narendra Modi have announced a target for the country to achieve net zero by 2070. At COP27, India submitted its first Long-term Strategy for Low Carbon Development (LTS), providing strategic direction for the economy and individual sectors in support of the previously announced and submitted targets.”(climateactiontracker.org, 2022)

INDIAN REGULATORY FRAMEWORK CONCERNING ENVIRONMENT ISSUES:

  • Environment Protection Act 1986
  • Water (Prevention and control of pollution) Act 1974
  • Air (prevention and control of pollution) Act 1981

♦ SOCIAL

It focuses on how a company manages relationships with and create long term value for stakeholders. It considers people and relationships.

  • Customer Satisfaction
  • Gender and diversity
  • Human rights
  • Labour standards
  • Community relations
  • Employee engagement
  • Product or service safety
  • Data protection and privacy

For instance, “Lack of proper due diligence of South Korean-owned Taekwang factory partnered with Chinese-government-run forced-labor programs that are linked to crimes against humanity caused Nike of being accused of using forced labour in Asia consequent of which it had to face protests, boycotts and loss of institutional consumers.” (Discoursemagazine.com,2022)

Corporate Social Responsibility is a facet of social factor. According to CSR Asia, CSR refers to company’s commitment to operate in an economically, socially and environmentally sustainable manner while balancing the interests of diverse stakeholders.

The philosophy is to return back to society what it has taken from it during the course of wealth creation. CSR is also called as corporate citizenship or corporate responsibility of business. Section 135 of Companies Act 2013 read along with the Companies (corporate social  responsibility policy) rules, 2014 has discussed in detail about the regulatory aspect of CSR.

INDIAN REGULATORY FRAMEWORK CONCERNING SOCIAL ISSUES

  • Factories Act,1948
  • Employees compensation act,1923
  • Contract labour (regulation and abolition) Act,1970
  • Equal remuneration Act,1976
  • The minimum wages act, 1948
  • Employees’ provident fund and miscellaneous provisions act, 1952
  • Employees’ state insurance act, 1948

♦ GOVERNANCE

Governance standard ensures that companies are applying best management practices, adhering to ethical standards for effective management, pursues diversity in selecting leadership and discharge of social responsibility for sustainable development and wealth creation of stakeholders.

  • Board diversity, equity and inclusion (DE&I)
  • Supply chain management
  • Reporting, transparency and business ethics
  • Executive compensation
  • Whistleblower schemes
  • Audit committee structure
  • Bribery and corruption

Governance factor includes various issues that can be considered as environment or social concerns as there is no universal categorization.

INDIAN REGULATORY FRAMEWORK CONCERNING GOVERNANCE ISSUES –

1. Companies Act,2013

2. Prevention of money laundering Act, 2002

3. Prevention of corruption Act, 1988

4. Securities and exchange board of India Act,1992

5. SEBI (listing obligations and disclosure requirements) Regulations, 2015

According to Hendrith Vanlon Smith Jr, CEO of Mayflower-Plymouth – “ESG impact profitability – regardless of what industry your company is in. People like to know that the companies they interact with and buy from companies that do good in the world.”

IMPLEMENTATION OF ESG IN INDIA

As per the report of UNICEF, In 2019, India was the 7th most affected country due to climate change led extreme weather events. Catastrophic effects of climate change can be seen in form of increased frequency and intensity of heatwaves, severe landslides and floods in northeastern states, increased chances of drought, fatalities and economic losses. However, India has started seeing ESG as a major opportunity in reversing the climate change effects and following steps have been taken-

1. At 26th Conference of parties (COP 26), Prime Minister Modi pledged to achieve 40% decrease in carbon intensity by 2030 and achieving net zero by 2070.

2. Numerous government programs to combat climate change has been introduced including Clean Air mission, national electric mobility mission plan, national solar mission, Indian cooling action plan.

3. Union budget 2023 demonstrates efforts to be taken by Indian government towards a sustainable and resilient economy by achieving net zero and sustainable development goals (SDG). One of the Saptrishi priorities of Amrit Kaal is green growth which includes schemes such as PM PRANAM, 500 new ‘waste to wealth’ plants under GOBARdhan scheme, green credit programme, Amrit Darohar for mangrove plantation, allocating funds for replacing old polluting vehicles and many more.

4. In line with national voluntary guidelines on social, environmental and economic responsibilities of business, in pursuant to regulation 34(2)(f) of SEBI LODR regulations 2015, SEBI had mandated requirement of submission of business responsibility and sustainability report (BRSR) replacing the existing business responsibility report(BRR) for top 1000 listed entities based on market cap. 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 .

5. Companies Act, 2013 mandates that in pursuant to section 134(3)(m) the board report which is circulated to company shareholders shall include information relating to efforts of company on the conservation of energy.

TOP PERFORMING ESG COMPANIES IN INDIA AND THEIR EFFORTS

  • Ambuja Cements saves around 70 million liters of water at construction sites through concrete mix proportions and rainwater harvesting.
  • Hero Motocorp has increased its female staff strength in FY22 to 2,079 from 1,520 and specially-abled employees to 2,112 in FY22 from 1,939.
  • Havells eliminated the use of radio active components in all of its products and installed 4 zero water discharge facilities, 2 biomass and solar lamps and 4 resource conservation initiatives across its plants.
  • Godrej is focusing on making 100 % of packaging material which is reusable, recyclable and compostable by FY2025. It has successfully reduced water consumption by 32% and greenhouse gas emissions by 37%.
  • Ultratech belonging from the carbon intensive industry has integrated low carbon strategy into its business roadmap to achieve SDG’s.
  • HUL had started a Suvidha Centre in most challenged slums of Mumbai focusing on issues like lack of personal hygiene, non-availability of safe drinking water facilities and poor sanitation. (indiatimes.com,2020)

CONCLUSION

As per the research conducted by JP Morgan, COVID 19 has been the major turning point for growth of ESG as a concept. It is considered by investors as 21st century’s first sustainability crisis and acted as a wakeup call for investment analysts to consider ESG issues before taking investment decisions. According to a survey of global institutional investors by EY, 90% of investors gave greater importance to companies’ ESG performance post the pandemic and 86% said that corporate decarbonisation is key to their investment decision.

By introduction of ESG investing, stakeholders are expected to scrutinize companies after considering ratings of various sustainability indices including Dow-jones sustainability index, Environment, social and governance index, standard & poor ESG India index or SDG index and monitoring etc. and institutional investors and funds should incorporate various ESG investing approaches.

As per the new study of global employment site INDEED, jobs in ESG industry have taken a boost by 468% over the last 3 years from April 19 to April 22. Therefore it’s a great time to be a part of ESG revolution. If one is concerned about environment and society then entering into this extremely rewarding profession by becoming an ESG professional not only assures a promising career but also a sustainable and enduring future.

REFRENCES:

1. THE INSTITUTE OF COMPANY SECRETARIES OF INDIA,2022,’GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS’

2. CORPORATE FINANCE INSTITUTE,2023,’INTRODUCTION TO ESG’

3. SUSHANT GUPTA,2022,’WHY DOES ESG HOLDS GREAT JOB PROSPECTS IN INDIA’

4. GOV.IN,2023,’KEY FEATURES OF BUDGET 2023-24’

5. COM,2020,’WHY COVID19 COULD PROVE TO BE A MAJOR TURNING POINT FOR ESG’ – http://jpmorgan.com/

6. RUPINDER MALIK, AASHIT SHAH, ABIN FRANCIS,2022,’ESG COMPARATIVE GUIDE’

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