The ESG-audit edge: They boost firms’ competitive advantage
December 5, 2020 7:30 AM
ESG includes within its purview a wide range of environmental, social and governance factors through which an investor can either evaluate themselves or set minimum standards for companies to abide by to obtain funding.
While 62% of respondents believe that ‘good business’ constitutes more than a financial return, 14% associate the term with qualities such as environmental consideration and community commitments
By Nawneet Vibhaw
PM Narendra Modi while speaking at the Virtual Global Investor Roundtable 2020, last month, highlighted the increasing global focus of investors towards companies having a high Environmental, Social and Governance (ESG) score. The PM further added that India already has systems and companies which rank high on such parameters as it believes in following the path of growth with equal focus on ESG. India, last year, released the National Guidelines on Responsible Business Conduct (NGRBC). The idea was to align the already existing National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs) with the Sustainable Development Goals (SDGs), the United Nations Guiding Principles on Business & Human Rights (UNGPs) and other global sustainability standards.
ESG includes within its purview a wide range of environmental, social and governance factors through which an investor can either evaluate themselves or set minimum standards for companies to abide by to obtain funding. It is essentially the performance of the business on such aspects, in addition to its financial performance. Most investment funds in India are increasingly focussing on sustainable ESG practices as they affect the capital cost. While this is not even close to the amount of international investments, it is a great beginning for a growing economy. The ESG factors are no longer merely ethical considerations but have the potential to affect the revenue or funding of the companies.
Companies can adopt various means to showcase their commitment. These include measures like non-financial reporting, ESG due diligence and ESG or sustainability policy and management system. A dedicated ESG policy or management system could serve as a guide for business operations of the company, whereas, in the case of investors, it could help them make responsible investments.
In so far as the non-financial reporting models are concerned, many Indian companies are increasingly following the globally recognised voluntary disclosure frameworks like United Nations Principles of Responsible Investment (UNPRI), Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), Sustainability Accounting Standards Board (SASB) and Dow Jones Sustainability Indices (DJSI). The NGBRC Guidelines released by the MCA, in 2019 provide for a disclosure mechanism in the form of a Business Responsibility and Sustainability Reporting (BRSR) format.
Top 1,000 listed companies are mandated to publish the BRSR report along with their annual report. The new BRSR framework is India’s response to the growing market and investor demands on ESG reporting and investing. Stringent global reporting requirements, including those by the Task Force on Climate-related Financial Disclosure (TCFD), are also being made mandatory not only by investors but also by sovereign nations, with New Zealand becoming the first country to make it compulsory.
Almost every company has become sensitive to ESG in an attempt to have favourable rankings, gain a competitive advantage, reduce operational costs and thereby boost top-line growth. Socially conscious investing not just leads to better returns but also helps predict and mitigate non-financial risks.
Partner, Shardul Amarchand Mangaldas & Co; focusses on the firm’s Environmental Law practice. Views are personal