By Punit Renjen
Environmental, Social, and Governance. ESG. This three-letter acronym now dominates the conversation among government, business, and community leaders alike. And with good reason.
Urgency around issues like climate change, access to education, and health equity have pushed ESG to the forefront of corporate agendas and strategies. In India and around the world, disclosure requirements, which hold businesses accountable for identifying and reporting their ESG responsibilities, have become more uniform and consistent—a testament to this long-anticipated (and, in my opinion, much-needed) shift.
Beginning this fiscal, the Securities and Exchange Board’s (SEBI) new reporting format—Business Responsibility and Sustainability Report (BRSR)—has come into effect. BRSR will enable the top 1,000 listed entities by market capitalisation to voluntarily disclose their compliance on various ESG metrics for FY22, and on a mandatory basis from FY23.
Although India will be getting a year-long dress rehearsal, I believe all organisations—whether in the top 1,000 or not—should be striving to adhere to, and go beyond BRSR, sooner rather than later. Not just because the new requirements will mean ESG performance data will be available, and comparable to all, but because it is the right thing to do and the right business thing to do.
Adapting a new regulatory framework is a significant change—and challenge. But there are three steps leaders can take now to help ease the transition.
First, perspective is critical. Business leaders should view the disclosure standards not as a compliance requirement but as the structure around which strong companies are built. The reality is that businesses often thrive when they are built to create social value alongside financial value. The research continues to bear that out. Case in point: Over a 12-year period, the MSCI India ESG leaders index consistently outperformed the broader market as represented by MSCI India Investable Market Indexes (IMI)—and their lead has widened. These results speak to the fact that when businesses choose ESG as a core component of their operational strategy, they not only improve their own performance, but also more effectively position themselves with their customers, communities, and business partners. It creates a halo effect which underpins their “social licence to operate” and can even help in the attraction and retention of talent.
Second, be transparent and accountable. Businesses can and should increase transparency by linking their reporting to real world issues and disclosing the impact they aim to deliver. For example, sharing ESG metrics on the financial impact of climate change. This enables investors to make decisions on comprehensive and comparable information. And that, of course, can positively impact a company’s reputation. By providing financial markets with the right information, businesses can build confidence that money flows where it is needed to boost resiliency and curb emissions.
This level of transparency also has important implications for the cost of doing business. Those companies that are exposed to long-term climate-related risks may see higher costs of doing business while companies that develop climate risk mitigation strategies could have access to cheaper capital. We’ve seen this with the increase in sustainability-linked loans; loans given to companies at a discounted rate if they meet tailor-made sustainability targets. A critical priority for leaders is to back up their ESG initiatives and aspirations with actual investments. Showing that they’re acting upon their data. It provides a framework which can be evaluated and is part of the feedback-strategy which places ESG at the core of business.
Third, report beyond the minimum. The guidelines should be seen as a baseline; organisations need to be bold. Going beyond the requirements will help give Indian organisations greater access to capital and greater competitive advantage. This could help spur India’s private-investment cycle.
Several leading global reporting frameworks such as the WEF stakeholder capitalism metrics, which Deloitte helped to develop, have significant investor involvement in their formulation. Additionally, more and more asset managers have launched ESG funds, which use ESG performance as a key input in making investment decisions. This is reflected in the various green financial products and instruments (equity, loans, bonds) that have evolved and the growing size of their market. By going beyond the requirement, and understanding other global standards, companies can open themselves up to a growing pool of capital.
Right now, momentum around ESG is high. This is where business is heading. And I believe it is essential that Indian organisations seize this moment to embrace ESG and make it a fundamental part of their business. Not only will this help to secure their own futures, but to build a better world for all of us.
(The author is Deloitte Global CEO)