Environmental, Social and Governance (ESG) factors, informing businesses, has become a key priority for companies around the world. Investors also are focussed on the efforts that companies are putting in towards promoting ESG.
There is no exhaustive list of attributes/criteria that are covered under ESG. Environmental criteria include, but are not limited to, climate change, carbon emission, water conservation, energy conservation, waste management, biodiversity, and the like. Social criteria include gender diversity, employee engagement, health and safety, community relations, human rights, customer satisfaction, and the like. Governance criteria include Board composition, committee composition, percentage of Independent Directors, whistleblower or vigil mechanism, and the like.
With growing importance of ESG, companies are taking decisions which promote sustainability, as also looking at sustainability as a branding strategy that offers long-term benefits like enhanced customer relationships and a strong reputation.
With increasing demand for ESG disclosures, the need for sustainability reporting has increased around the globe. Several standards/ principles relating to ESG, such as GRI guidelines, United Nations Sustainable Development Goals, United Nations Global Compact Principles, Task Force on Climate Related Financial Disclosures, PRI etc, have come into being.
ESG reporting in India started in 2009, with the Ministry of Corporate Affairs issuing the National Voluntary Guidelines (NVGs) on Corporate Social Responsibility. In 2012, SEBI mandated top 100 listed companies to file Business Responsibility Report (BRR), based on NVGs, along with annual reports. This requirement was later extended to top 500 companies, and then to top 1000 companies. Integrated reporting, on a voluntary basis, was introduced by SEBI in 2017, for top 500 companies. National Guidelines on Responsible Business Conduct (NGRBC) came into being in 2019.
In 2021, SEBI introduced Business Responsibility and Sustainability Report (BRSR) in place of BRR, for top 1000 listed companies, making it voluntary in FY 2021-22, and mandatory from FY 2022–23. BRSR is a standardised reporting format that will provide various datapoints to compare ESG goals across companies/ industries/ sectors. It has been introduced to bring the reporting standards at par with global ESG reporting trends. It is to be noted that BRSR contains more quantified disclosures as compared to BRR.
In addition to following mandatory disclosures, there are some well governed companies which are either publishing ESG/ Sustainability reports, on a continuing basis, or have a dedicated ESG/ sustainability related page on their website. Many companies which follow the practice of publishing ESG/ Sustainability reports follow one or more global reporting standards.
In October, 2021, SEBI introduced a consultation paper for ESG Mutual Fund (MF) schemes, taking into consideration the consultation report of IOSCO. It proposed that ESG focused MFs must invest in only those companies that are covered under the mandatory disclosure of BRSR. It also proposed that ESG focused schemes must use a scoring technique (either developed in-house or by a third party) that distinguishes ESG compliant companies from ESG non-compliant companies. This is aimed at establishing a link between the financial results of a company and its ESG performance. The framework proposed by SEBI is in line with international standards.
ESG investing in India has been steadily gaining momentum in the last five years. It has been estimated that inflows into ESG MF schemes in India have increased by 76% in 2021, from Rs 2,094 crore to Rs 3,686 crore during the period 2019-20. In addition to this, in 2020, many Asset Management Companies (AMCs) have launched schemes that have a clear focus on ESG. ESG assets in India are expected to exceed $53 trillion by 2025 and would represent more than one-third of the $140.5 trillion in projected total assets under management (AUM). As on September 30, 2021, there were eight ESG Thematic equity schemes with an AUM of INR 12,085 Crores. There was one ESG ETF and one ESG ETF Fund of funds with AUM of INR 174 Crores and INR 144 Crores respectively as on September30, 2021.
According to a study by Edelweiss Securities Ltd, Nifty 100 ESG index has outperformed the key Indian benchmark Index Nifty 50, by posting returns of 51%. The latter has risen by 47% in the same time span.
At the 26th Conference of Parties (CoP26), India has pledged that by 2030, it will reduce the carbon intensity of its economy by less than 45% and by 2070, it will achieve the target of Net Zero emissions.
While ESG investing in India shows positive trends, there are several challenges which corporates are facing in achieving ESG goals. Some of them are:
- No standard definition for terms like ‘sustainable’, ‘ESG’, ‘green’, ‘climate’ and ‘responsible’ investing etc. Many a times, ESG and sustainability are used interchangeably.
- All ESG indicators cannot be converted into quantitative variables. This makes comparison of ESG efforts among various companies/ industries/ sectors difficult.
- Lack of professionals with standardised skillsets in ESG domain.
In the ultimate analysis, ESG will be a major instrument in ensuring equitable and sustainable development, if corporates act out of conviction, and not out of compulsion.