This article provides an introduction to the Environmental, Social and Governance (ESG) sector, explaining in detail why it appears to be one of the most promising picks for the global economy. The article provides a basis to understand how a company’s social sustainability can be linked with its growth potential and future opportunities. This piece provides the perfect platform for beginners looking to learn about the ESG sector, discussing as well the financials of the top 10 ranked ESG companies in India to provide a complete perspective.
ESG stands for Environmental, Social and Governance and refers to a set of standards for a company’s social responsibility. Investors that are socially conscious are increasingly using this metric as a part of their criteria in the selection of their investment portfolios.1 The Environmental, Social and Governance score helps ascertain how a company performs as a “steward of nature”- its corporate climate policies, energy use, wastage, transparency in its disclosures, how it moderates its relationships with its stakeholders and how ethical and responsible it is in terms of its management practices and leadership.2
The Environmental component refers to a company’s contribution in the preservation of the natural world and maintaining an environmentally responsible practice. This component includes company policies on climate change, carbon emissions, air and water pollution, deforestation, and also factors such as resource optimization, waste minimization and efficient energy use. The Social component takes into account the company’s policies on people and relationships with its customers, employees and other stakeholders. This includes factors such as data protection and privacy, community relations and opportunities in community welfare, CSR contributions, labour standards, employee engagement, customer satisfaction and gender and diversity. Lastly, the Governance component takes into account the standards of running and functioning of a company. This component includes factors such as a company’s leadership, board composition, bribery and corruption, political contribution, transparency in its management and accounting practices, audits, and shareholders rights.3
While the ESG criteria might play a role in the portfolio of a socially conscious investor, this criteria is forming the basis for analysing companies in terms of long term sustainability and in turn profitability, for all investors. There are several factors that suggest that a higher ESG score will lead to better financial performance for a company in the long run. A higher ESG performance is likely to increase top line growth, for example with a company in the consumer goods sector. A company with a more sustainable overall approach in terms of its business, governance and other endeavours, is more likely to have higher customer acquisition and loyalty, considering the current consumer climate. Another quite direct impact of ESG performance is cost- a company that is more efficient in terms of its resource use, water use, energy use etc., is more likely to have lower costs of production and in turn higher margins. The next factor that is affected by ESG performance is the “regulatory relationships” of a company- that is the company’s relationship with governmental and other regulatory authorities. Companies that are more responsible in terms of their environmental footprint and overall sustainability, are less likely to face punitive action from these regulatory authorities, potentially saving them millions in legal costs.4
The ESG performance of a company can also play a key role in attracting new talent, given the socially conscious workforce of the new generation. Millennial workers are often looking to find companies with high standards of social and business sustainability. Hence, a higher standard of social responsibility can play a key role in bringing in new talent. A similar ideology can be thought of from an investor’s perspective, with them identifying higher growth potential in companies with higher ESG scores, hence leading to higher potential capital for the company.5 In line with recent developments, brokerage firms and mutual fund companies have also started offering exchange traded funds and other financial products that are in line with the ESG criteria.6 According to estimates by Bloomberg Professional Services, Global ESG assets are on track to exceed 53 trillion dollars by 2025, hence forming more than a third of the total 140.5 trillion dollars in projected assets under management.7 The ESG sector is hence just at the beginning of its growth and is deemed to be one of the most promising sectors to consider for the next 5-10 years, for anyone as an investor.
ESG Norms and Reporting in India
India took its first major step towards sustainable corporate growth in 2013, with the introduction of the Companies Act, replacing the Companies Act (1956). The Companies Act regulates the institution and operation of all corporate entities in India. With the incorporation of this Act, India became the first country to mandate Corporate Social Responsibility, taking forward the recommendations of the National Voluntary Guidelines (2011). The introduction of the Companies Act brought with it several new provisions including- self-regulation with respect to transparency and disclosures, requirements for public companies to have independent directors, mandatory formation of CSR committees and policies, providing more power to company shareholders and representation of small shareholders, and the introduction of the National Company Law Tribunal replacing the existing Company Law Board.8
The introduction of the Companies Act essentially devised a solution, at least in theory, to increase transparency and disclosures, along with ensuring that companies are held accountable for the vested interests of their stakeholders. Additionally, in 2015 the top 500 firms by market capitalization were also instructed by the Securities and Exchange Board (SEBI) to publish a Business Responsibility Report (BRR) according to the format prescribed by the National Voluntary Guidelines (2011) (increased from the top 100 firms in 2012), to ensure that appropriate disclosures and transparency were mandated.9 The BRR provides a complete understanding of the governance, business responsibility and social sustainability of companies and has been an influential step taken by the government in propagating the relevance of the ESG sector. Business Responsibility Reporting was updated as per the National Guidelines on Responsible Business Conduct (NGRBC) as of 2019 and has transitioned to Business Responsibility and Sustainability (BRSR) reporting as of 2021.10
The Business Responsibility Report is divided into 5 major sections: the first section contains general information about the company such as its industry/ sector, products, services, markets et cetera. The second section focuses on the key financials of the organisation such as the turnover, profits, paid up capital and its Corporate Social Responsibility (CSR) contributions. The next two sections focus on business responsibility initiatives at subsidiaries of the company and the overall company structure, governance policies and other policies that align it with the prescribed standards of business responsibility. The fifth and last section, “Principle-wise Performance”, contains information on the indicators used to assess the company’s performance relative to the 9 business responsibility principles outlined by the National Voluntary Guidelines (2011).
Findings of this Article
This article refers to an ESG Performance ranking from the platform “Futurescape”, which uses a measure called the “Spread” in its analysis of companies. The “Spread” is basically a combined score of a company’s environmental, social and governmental parameters.11 Futurescape provides a ranking of the top 10 listed companies by ESG parameters and this has been referred to for analysis in this article. The top 10 ranked companies in terms of ESG parameters are from a variety of sectors and industries, however interestingly, they do not feature any public sector companies. No particular group or sector of companies dominates the top 10 performers, with this list also featuring diversified organisations such as ITC and Grasim Industries. Godrej Consumer Products is the highest rated company in terms of ESG performance.12
However, there is a caveat in the evaluation of these companies in terms of ESG scores. The improvement in performance of these companies leans towards the Environmental parameter, as the trend amongst Indian corporates often showcases higher scores for the Environmental criteria, with significant scope for improvement in the Social and Governance parameters.13 The company’s scores are an average of the scores of the E, S and G parameters, and hence an increase in the Environmental score contributes equally to an increase in the rankings. Despite improvements in recent years, corporates at an Indian level have still not been found to consistently match the standards of business and governance of the global economy, which partially skews their ESG rankings.
Through this article, these top 10 companies have been analysed and compared in terms of their top line and bottom line figures, debt, CSR, employee benefits et cetera, to provide an understanding of what differentiates them from companies with a relatively lower ESG score. As all of these companies are listed, it was possible to obtain their financials through their annual reports and financial statements. This article carried forward its approach through a thorough analysis of the company annual reports, with particular focus on the income statements and balance sheets. Along with the basic given figures, this article also takes into account profit margins, return on net worth, debt-equity and other financial ratios, which have all been calculated through plotting the company financials on Excel for the years 2019 through 2021. The formulas for calculation of these ratios can be found in the appendix attached at the end of the article.
The list of companies that have been taken into account for analysis are:
1. Godrej Consumer Products Ltd
2. Infosys Ltd
3. Wipro Ltd
4. Tata Chemicals Ltd
5. ITC Ltd
6. Jubilant Life Sciences Ltd
7. Grasim Industries Ltd
8. Vedanta Ltd
9. Tata Power Company Ltd
10. JSW Steel Ltd
2019 Figures
2020 Figures
Company Name |
Go-drej |
Info-sys |
Wipro |
Tata Che |
ITC |
Jubi-lant |
Gra-sim |
Vedanta Tata Pow |
JSW |
|
Total Revenue |
5474.45 |
81747 |
52883. 60 |
3229.44 |
49821. 0 |
3313.1 3 |
16607. 5 |
38728 |
8309. 01 |
64890 |
Profit/Year |
1179.89 |
15543 |
8680. 70 |
6840. 22 |
15136 |
321.14 |
1288. 00 |
-6732 |
148.12 |
5291 |
LT Borrowings |
0.00 |
0.00 |
25.10 |
10.41 |
5.63 |
1327. 91 |
2714.18 |
21629 |
9825. 33 |
39247 |
Emp Benefits Exp |
319.22 |
42434 |
26171. 80 |
250.28 |
2658.2 |
264.90 |
1559. 98 |
765 |
610.71 |
1496 |
CSR |
19.49 |
360 |
181.80 |
37.81 |
326.49 |
4.40 |
58.98 |
52.66 |
3.80 |
139.73 |
Debt/ Equity |
0.06 |
0.00 |
0.11 |
0.00 |
0.00 |
0.75 |
0.13 |
0.46 |
1.02 |
1.20 |
Ret On Assets |
17.34% |
19.42% |
13.12% |
49.94% |
20. 87% |
6.24% |
2.54% |
-4.37% |
0.39% |
4.66% |
Net Profit Marg |
21.55% |
19. 66% |
17.22% |
234. 23% |
33. 17% |
10. 22% |
8.00% |
-18. 77% |
1.91 |
8.23% |
Current Ratio |
1.20 |
2.88 |
2.78 |
2.81 |
4.02 |
1.25 |
1.10 |
0.43 |
0.53 |
0.83 |
Quick Ratio |
0.81 |
2.88 |
2.77 |
2.22 |
3.13 |
0.78 |
0.75 |
0.30 |
0.47 |
0.55 |
Op Profit Marg |
26.44% |
25.3 4% |
20.24% |
24.58% |
39.24% |
11.81% |
13.27% |
16.25% |
37.81% |
19. 47% |
Ret/Net Worth |
22.86% |
24.97% |
18.68% |
57.11% |
23.64% |
12.32% |
3.42% |
-9.08% |
0.97% |
13.79% |
Basic EPS (Rs) |
11.54 |
36.34 |
16.67 |
268.5 |
12.33 |
20.16 |
19.63 |
-18.10 |
-0.08 |
22.03 |
(Figures in Rs Crores)
2021 Figures
Company Name |
Godrej |
Infosys |
Wipro |
Tata Che |
ITC |
Jubilant |
Grasim |
Vedanta Tata Pow |
JSW |
Total Revenue |
6254.33 |
88379 |
52682.30 |
3218.03 |
51776 |
2757.38 |
12900 |
48388 7429.55 |
71396 |
Profit/Year |
1224.34 |
18048 |
10060.90 |
479.11 |
13032 |
214.48 |
905.00 |
10446 921.45 |
8393 |
LT Borrowings |
0.00 |
0.00 |
14.10 |
4.85 |
5.28 |
420.00 |
3089.46 |
20913 13168.5 |
39551 |
Emp Benefits Exp |
417.09 |
45179 |
26467.30 |
250.42 |
2821 |
220.67 |
1391.29 |
903 649.07 |
1501 |
CSR |
31.08 |
412 |
251.20 |
20.92 |
353.46 |
5.83 |
84.66 |
38.86 39.24 |
78.32 |
Debt/ Equity |
0.00 |
0.00 |
0.13 |
0.00 |
0.00 |
0.38 |
0.09 |
0.29 1.05 |
0.87 |
Ret On Assets |
16.73% |
20.63% |
15.36% |
3.41% |
17.75% |
5.89% |
1.74% |
7.54% 2.29% |
6.58% |
Net Profit Marg |
19.58% |
21.00% |
20.00% |
15.97% |
28.65% |
7.29% |
7.30% |
28.05% 14.90% |
11.86% |
Current Ratio |
1.55 |
2.74 |
2.50 |
2.77 |
3.13 |
0.55 |
1.15 |
0.57 0.45 |
0.87 |
Quick Ratio |
0.98 |
2.74 |
2.50 |
2.27 |
2.20 |
0.55 |
0.80 |
0.42 0.39 |
0.51 |
Op Profit Marg |
26.42% |
28.46% |
23.96% |
20.37% |
34.12% |
15.76% |
12.62% |
23.13% 29.39% |
27.23% |
Ret/Net Worth |
19.25% |
25.23% |
22.23% |
3.61% |
22.09% |
16.72% |
2.11% |
13.60% 5.01% |
17.87% |
Basic EPS (Rs) |
11.97 |
42.37 |
19.11 |
18.81 |
10.59 |
13.47 |
13.78 |
28.23 2.49 |
34.92 |
(Figures in Rs Crores)
Conclusion
Several recent reports suggest that customers who are “eco-active” in terms of their consumption habits and patterns, will grow rapidly over the next 10 years.14 Hence, for the major corporations to continue to be competitive at the highest level, a shift will need to be implemented in not just their sustainability and governance policies, but in their overall business philosophy. The ESG sector is not just limited to the financial results of companies in the short run, but is about how businesses are implementing significant policy changes to ensure a feasible and sustainable future.
The company financials published and discussed in this report provide key insights that solidify the above points. While many companies in the report maintain a low debt-equity ratio, there are also several exceptions that stand out with large long term borrowings and debt indicators. Similarly, companies such as Vedanta and Tata Power have had years where their shareholders suffered losses with negative Earnings Per Share (EPS) figures, while other companies experienced low and even negative profit margins and return on net worth. Despite recent discrepancies, these companies still feature at the very top of the ESG charts15, as their overall approach to sustainability and transparency ensures customer loyalty and support. Both customers and investors look not only at the financials published by companies, but their consolidated approach in ensuring a viable and sustainable business for the future. Stakeholders are looking for businesses that are answerable to them in all facets of their running, functioning and reporting. The companies in this report have been consistently diligent with their integrated annual reporting, ensuring that they are transparent with their stakeholders in terms of their management, governance and social practices.
The ESG sector is capturing the consumer and investor market as the requirements of the business world are no longer merely profitability and positive financial indicators, but a business that is well-founded in its sustainability and transparency practice. The increasing growth in the financial size of this sector will likely cause major corporations to transition from existing business practices to more socially responsible ones, if they have not already, showing that the growth of ESG has some reverse causality to it. The trend associated with consumers preferring more sustainable products and services over ones that are less so can be a deciding factor in reducing the environmental footprint of the corporate world for the foreseeable future.
1 Team, The Investopedia. “Environmental, Social, & Governance (ESG) Criteria Definition.” Investopedia. Investopedia, May 18, 2022.
https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp.
2 Sanghvi, Ajit R. “Top Performing ESG Companies in India & How Are Their Stocks Faring.” The Economic Times, 2020. https://economictimes.indiatimes.com/markets/stocks/news/top-performing-esg-companies-in-india-how-are-their-st ocks-faring/articleshow/79935953.cms.
3 Institute, CFA. “ESG Investing and Analysis.” CFA Institute. Accessed June 7, 2022.
https://www.cfainstitute.org/en/research/esg-investing.
4 “Why ESG Is Here to Stay.” McKinsey & Company. McKinsey & Company, May 26, 2020. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/why-esg-is-here-to-stay.
5 “Why ESG Is Here to Stay.” McKinsey & Company. McKinsey & Company, May 26, 2020. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/why-esg-is-here-to-stay.
6 Team, The Investopedia. “Environmental, Social, & Governance (ESG) Criteria Definition.” Investopedia. Investopedia, May 18, 2022.
https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp.
7 Intelligence, Bloomberg. “ESG Assets May Hit $53 Trillion by 2025, a Third of Global AUM.” Bloomberg.com. Bloomberg, February 23, 2021.
https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/.
8 “Companies Act 2013 – Salient Features of the Indian Companies Act 2013 [UPSC GS-II].” BYJUS. BYJU’S, December 24, 2021. https://byjus.com/free-ias-prep/indian-companies-act/.
9 Bhatia, Atishay. “ESG Reporting in India to Be Mandatory for Big Firms from FY 2022-23.” India Briefing News, October 29, 2021.
https://www.india-briefing.com/news/esg-reporting-india-new-disclosure-requirements-sustainability-23471.html/.
10 “BRSR: Business Responsibility and Sustainability Reporting.” Consultivo, January 23, 2022. https://consultivo.in/brsr-business-responsibility-sustainability-reporting-faqs/.
11 Futurescape. “ESG Performance.” Futurescape. Accessed June 7, 2022. https://www.futurescape.in/responsible-business-rankings/esg-performance/.
12 Futurescape. “ESG Performance.” Futurescape. Accessed June 7, 2022.
https://www.futurescape.in/responsible-business-rankings/esg-performance/.
13 Futurescape. “ESG Performance.” Futurescape. Accessed June 7, 2022. https://www.futurescape.in/responsible-business-rankings/esg-performance/.
14 Jones, Debbie. “Key Takeaways from the ESG Conference.” Deutsche Bank Research, April 27, 2022. https://www.dbresearch.com/servlet/reweb2.ReWEB?rwsite=RPS_EN-PROD&rwobj=ReDisplay.Start.class&docu ment=PROD0000000000522888.
15 Futurescape. “ESG Performance.” Futurescape. Accessed June 7, 2022.
https://www.futurescape.in/responsible-business-rankings/esg-performance/.
References
1. Team, The Investopedia. “Environmental, Social, & Governance (ESG) Criteria Definition.” Investopedia. Investopedia, May 18, 2022. https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp.
2. Sanghvi, Ajit R. “Top Performing ESG Companies in India & How Are Their Stocks Faring.” The Economic Times, 2020. https://economictimes.indiatimes.com/markets/stocks/news/top-performing-esg-companies-in-india-how-are-their-st ocks-faring/articleshow/79935953.cms.
3. Institute, CFA. “ESG Investing and Analysis.” CFA Institute. Accessed June 7, 2022. https://www.cfainstitute.org/en/research/esg-investing.
4. “Why ESG Is Here to Stay.” McKinsey & Company. McKinsey & Company, May 26, 2020. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/why-esg-is-here-to-stay.
5. Intelligence, Bloomberg. “ESG Assets May Hit $53 Trillion by 2025, a Third of Global AUM.” com. Bloomberg, February 23, 2021. https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/.
6. “Companies Act 2013 – Salient Features of the Indian Companies Act 2013 [UPSC GS-II].” BYJUS. BYJU’S, December 24, 2021. https://byjus.com/free-ias-prep/indian-companies-act/.
7. Bhatia, Atishay. “ESG Reporting in India to Be Mandatory for Big Firms from FY 2022-23.” India Briefing News, October 29, 2021. https://www.india-briefing.com/news/esg-reporting-india-new-disclosure-requirements-sustainability-23471.html/.
8. “BRSR: Business Responsibility and Sustainability Reporting.” Consultivo, January 23, 2022. https://consultivo.in/brsr-business-responsibility-sustainability-reporting-faqs/.
9. Chauhan, Sandeep Singh. “Recent Amendment on Business Responsibility Reporting (BRR).” TaxGuru, December 15, 2021. https://taxguru.in/sebi/amendment-business-responsibility-reporting-brr.html.
10. “ESG Performance.” Futurescape. Accessed June 7, 2022.
https://www.futurescape.in/responsible-business-rankings/esg-performance/.
11. Jones, Debbie. “Key Takeaways from the ESG Conference.” Deutsche Bank Research, April 27, 2022. https://www.dbresearch.com/servlet/reweb2.ReWEB?rwsite=RPS_EN-PROD&rwobj=ReDisplay.Start.class&docu ment=PROD0000000000522888.
Appendix
Debt/Equity Ratio = Total Debt/Total Equity
Return on Assets (Ret on Assets) (%) = Net Income/Average Assets
Net Profit Margin (Net Profit Marg) (%) = Profit After Tax/Net Sales
Current Ratio = Current Assets/Current Liabilities
Quick Ratio = Current Assets-Inventory/Current Liabilities
Operating Profit Margin (Op Profit Marg) (%) = Profit before interest, taxes and exceptional items/Net Sales
Return on Net Worth (Ret on Net Worth) (%) = Profit After Tax/Shareholder’s Equity Basic Earnings Per Share (Basic EPS), as per company annual reports
Total Revenue, Profit For the Year (Profit/Year), Long Term Borrowings (LT Borrowings), Employee
Benefits Expense (Emp Benefits Exp), CSR figures as per company annual reports
(Figures in Rs Crores)
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