In today’s world, climate change, Covid-19, technological disruptions, geopolitical tensions, and the uncertain future have only reinforced the belief among a growing number of corporates that business must have a purpose, such as adhering to environmental, social, and governance (ESG) norms. The challenge for business is that it must be governed by values and principles as well as profitability, which is what capitalism is all about. An early proponent of purpose-driven capitalism is the Business of Humanity project of the Katz Graduate School of Business, University of Pittsburgh, per which humanity-oriented decision-making leads to better economic performance over the long run. Humane decisions include the option of, say, eschewing layoffs during a downturn. Safety, quality, environmental sustainability, gender equality, and integrity are other examples.
As per Hindustan Lever’s chairman and managing director Sanjiv Mehta, it is the companies’ responsibility to find new ways to sustain performance and grow in a volatile environment while protecting the business model and embedding ESG in their strategy. “The fully integrated strategy”, Mehta said, “lays the pathway for us to realise the vision of being the leader in the sustainable business model and deliver the highest possible value not just as a business but to all our stakeholders”. He was only affirming the example of the parent company with its far-sighted leadership—like Paul Polman who led from 2009 to 2019—which doubled down on purpose in accelerating climate change actions within the company’s operations and the wider value chain. Unilever thus is committed to net zero emissions from all its products by 2039. An important lesson from the Polman era is that purpose can also help reduce workforce tensions and create optimum growth conditions.
India is already witnessing a growing intensity and frequency of global warming-induced extreme weather events, but the industry is only beginning to warm up to ESG compliance. The ESG score of 80% firms out of a sample of 586 assessed by CRISIL Research is either weak, below average, or adequate—categories indicating poor disclosure and inadequate risk management. There are 14 companies that have a leadership position in the ESG rankings, dominated mostly by IT firms, while transport infrastructure ones constitute the weak category. A major lacuna of ESG compliance is on the environmental front—the average is the lowest among E, S, and G norms—with only one in five across the sample providing disclosures on scope 1 (direct emissions from owned or controlled sources) and scope 2 ( indirect emissions from generation of purchased energy) emissions. PSUs performed better vis-à-vis private companies on the social front with higher scores on gender diversity, attrition, and pay gap between the CEO and median employee; but they lagged behind on governance practices.
India Inc needs to step up ESG compliance, although times are not easy for companies. Even Unilever is facing activist investor pressure to improve its sales performance and share price. This includes plans to cut several management jobs, much against the sense of purpose to be responsible and profitable and the dictats of the Business of Humanity. The Ukraine crisis has resulted in skyrocketing oil prices, forcing a search for more supplies, delaying the energy transition from fossil fuels despite pressure from ESG-driven investor activists to force oil companies to drill less. But it is also true that purpose-driven capitalism is good for the bottom-line. The top 10 Indian firms on governance registered higher profitability growth than the bottom 10.