by Jay Makhijani and Mansi Bahl
Background
ESG, or Environmental, Social and Governance is one of the core essentials of any business today. It is formulated out of the United Nations’s sustainable development goals and hopes to make the world shift to more sustainable forms of living. Though ESG has showcased importance for a long time it was earlier ignored as the business world did not take the field seriously, however it is now gaining significant momentum as countries worldwide are trying to live up to the promises they have made during COP27 and the Paris Agreement to shift to more sustainable forms of energy. Therefore, countries are implementing stricter regulations in the field of ESG and also giving concessions to companies that comply with the regulations. Hence, ESG is beginning to impact the business world in a way that no one had foresighted.
Forms of ESG Reporting
In order to report their ESG data organizations use many different frameworks some of the popular frameworks are the Carbon Disclosure Project which is primarily based in India, China, the UK, Japan, Germany, Brazil, and the USA and focuses on issues of water, forests and climate change and is popularly used in India by companies like Tata Steel. Other popular frameworks include Global Real Estate Sustainability Benchmark (GRESB), Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD) companies have become attentive towards their consumer needs and satisfying the growing demand of the stakeholders and investors which align best with the business's goals and SDGs.The Global Reporting Initiative (GRI) is largely accepted by Indian businesses to support their global presence.
Major ESG Regulations in India
ESG reporting in India officially started in 2009 with the Ministry of Corporate Affairs issuing voluntary guidelines for Corporate Social Responsibility. The Securities and Exchange Board of India (SEBI) has been a major driving force in implementing ESG regulations in India. It issued guidelines for mutual funds to integrate ESG practices in their investments in 2018. The Reserve Bank of India has been taking similar steps in the banking domain with creating a mandate for Banks to conduct Environment and Social Impact Assessments for all new projects, to ensure ESG principles are integrated into financing new projects.
ESG in the World of Indian Businesses
In the world of business, one of the biggest ESG developments has been the mandating of Corporate Social Responsibility (CSR) activities in 2013 under the Companies Act, which made it compulsory for all companies to conduct CSR activities. Another major development took place in 2019, when the National Guidelines on Responsible Business Conduct (NGRBC) came into effect, which were the founding principles for Business Responsibility and Sustainability Report (BRSR). Before the mandate in 2021 most CSR reporting in India was limited to big corporations like Tata and Reliance which usually complied with the GRI and UNGC principles as of 2009. However, after the introduction of BRSR there now exists a comprehensive framework that is mandated by the Indian government, that would involve cross-checks and further investment in the division of CSR and ESG.
Initially, BRSR was voluntary but as of 2021, it has been made mandatory for the financial year 2022-2023 for the top 1000 listed companies. This framework is based on the nine principles and it replaced its processor Business Responsibility Reporting (BRR) and is more qualitative in nature BRR was supposed to function as a tool for an easy transition to BRSR.
BRSR format is aligned with the Global Reporting Initiative which allows it to appeal to global standards as well, and considering how popular the framework is among Indian companies, the transition would also be easier. In terms of format, BRSR is divided into two major parts, these are essential and leadership indicators. The essential indicators are mandatory for every company under the guidelines of the report, while the leadership indicators are voluntary. Most of the essential indicators focus on details of a company’s impact on the environment, human rights indicators, health and welfare of employees, and their efforts to promote economic and social development. The leadership indicators go beyond these indicators to focus more on the company’s efforts towards innovating and adopting new sustainable mechanisms, it looks at all levels of a company’s engagement from stakeholders, consumers, and employees to analyze what has been done on each level to encourage a more sustainable and growth-oriented environment. Though voluntary, adopting leadership indicators can have a deeply positive effect on a company’s overall image, especially considering the Indian government’s push toward sustainability.
Table 1: Comparisons between 2021 and 2016 Sustainability Frameworks to indicate change in number to indicators and the increase in complexity.
Framework in 2021 | Framework in 2016 |
Conflicts of interest | DIVERSITY AND EQUAL OPPORTUNITY 2016 |
Communicating critical concerns | GRI 406: NON-DISCRIMINATION 2016 |
The collective knowledge of the highest governance body | FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING 2016 |
Evaluating the highest governance body’s performance | CHILD LABOR 2016 |
Remuneration policies | FORCED OR COMPULSORY LABOR 2016 |
Process for determining remuneration | SECURITY PRACTICES 2016 |
Annual total compensation ratio | |
Statement on sustainable development strategy | |
Policy commitments | |
Embedding policy commitments | |
Processes to remediate negative impacts | |
Mechanisms for seeking advice and raising concerns | |
Compliance with laws and regulations | |
Membership associations | |
Collective bargaining agreements | |
Approach to stakeholder engagement | |
The table illustrates the increase in complexity and detail in the 2021 framework compared to the 2016 one. The number of indicators and the details that need to be disclosed by a company have increased from 18 to 29 and the information is much more specific. This complexity is only bound to increase as India’s regulations aim to meet international standards.
Over the years, ESG frameworks have evolved, especially post the introduction of BRSR. An example of the same can be seen in the table below, if one compares the frameworks used by Tata Power in 2021 and the ones used by them in 2016.
Table 2: Tata Power GRI Indicators 2021-22 Annual Report v/s Tata GRI ESG
GRI Indicators 2021-22 Annual Report | Tata GRI Indicators for ESG |
Organizational Details | Environmental |
Entities included in the organization’s sustainability reporting | GRI 301: MATERIAL 2016 |
Reporting period | GRI 302: ENERGY 2016 |
Restatements of information | GRI 303: WATER AND EFFLUENTS 2018 |
External assurance | GRI 304: BIODIVERSITY 2016 |
Activities, value chain and other business relationships | GRI 305: EMISSIONS 2016 |
Employees | GRI 306: WASTE 2020 |
Workers who are not employees | GRI 307: ENVIRONMENTAL COMPLIANCE 2016 |
Governance structure and composition | GRI 308: SUPPLIER ENVIRONMENTAL ASSESSMENT 2016 |
Nomination and selection of the highest governance body | Social |
Chair of the highest governance body | GRI 401: EMPLOYMENT 2016 |
Role of the highest governance body in overseeing the management of impacts | GRI 402: LABOR/MANAGEMENT RELATIONS 2016 |
Delegation of responsibility for managing impacts | GRI 403: OCCUPATIONAL HEALTH AND SAFETY 2018 |
Role of the highest governance body in sustainability reporting | GRI 404: TRAINING AND EDUCATION 2016 |
Reasons Behind India’s Push For ESG
The world is becoming increasingly climate-conscious. Events like COP and the Paris Agreement are no longer for show and have to be taken seriously to have a good global reputation. India aspires to be a global leader and has promised to have net zero emissions by 2070 and it is one of the largest carbon emitters in the world. Hence, to live up to its promises the country needs to make drastic decisions, and encouraging companies to adopt a comprehensive ESG framework is a step in the right direction. Additionally, investing in ESG will boost the capital of Indian companies as the pool of global ESG-driven capital is in the trillions. Firms and stakeholders all over the world look at a company’s CSR performance and ESG indicators before investing, international standards for sustainability are also on the rise, and the inability to comply with these standards could reduce the investments for Indian companies. Following ESG mandates is not just an environmentally conscious decision but also one of economic advancement.
ESG also ensures the provision of better and cleaner services to clients as they receive products that are more sustainably manufactured. In Addition, increasing ESG investments can reduce India’s dependence on coal and push businesses to innovate new technologies that have lower carbon emissions. Some of the ESG indicators also ensure the protection of a country’s labor force, by ensuring that businesses do not employ child or slave labor in any domain of their businesses. Hence, ESG frameworks benefit both the business and the employees of a business.
Lastly, establishing proper ESG frameworks can allow India to make its products globally famous by contributing to more sustainable supply chain methods. Letting them compete with their global counterparts in global markets.
Importance of ESG for SMEs
Small and medium enterprises encompass a wide range of businesses across various industries. These enterprises play a crucial role in the Indian economy, contributing significantly to employment generation, GDP growth, and overall industrial development. SMEs are the ones that will have to develop an ESG framework from scratch as the regulations are fairly new to them in comparison to large businesses. Though investing in an ESG framework will be costly, it is the only way they can ensure their businesses stay relevant for the future. It can offer then a variety of benefits such as:
Access to Capital and Investment: Investors and financial institutions are increasingly considering ESG factors when making investment decisions. SMEs that prioritize ESG reporting may attract more interest from socially responsible investors and gain better access to capital, including loans and funding opportunities.
Improved Risk Management: ESG reporting helps SMEs identify and address potential risks related to environmental regulations, social impacts, and governance issues. By proactively managing these risks, companies can avoid costly penalties and reputational damage.
Talent Attraction and Retention: Many employees today prioritize working for companies that align with their values and contribute positively to society. ESG reporting can help SMEs attract and retain top talent by demonstrating their commitment to sustainability and social responsibility.
Competitive Advantage: SMEs that integrate ESG principles into their business strategies may gain a competitive edge in the marketplace. ESG-conscious consumers and businesses may prefer to engage with companies that demonstrate ethical practices and sustainability efforts.
Enhanced Innovation and Efficiency: Implementing ESG reporting can drive SMEs to adopt more sustainable and efficient practices. This focus on innovation and efficiency can lead to cost savings and improved resource utilization.
Regulatory Compliance: ESG reporting can assist SMEs in meeting evolving regulatory requirements related to environmental protection, social welfare, and corporate governance. By staying ahead of compliance obligations, companies can deal with government tenders and international partnerships.
Stakeholder Engagement and Trust: ESG reporting fosters transparent communication with stakeholders, including customers, suppliers, employees, and local communities. Building trust for SME business is essential to serve long-term partnerships.
Enhanced Reputation and Brand Value: ESG reporting showcases a company's commitment to responsible business practices. By demonstrating their efforts to address environmental and social issues, SMEs can enhance their reputation and build a positive brand image among customers, investors, and other stakeholders.
Hence, there are more advantages than disadvantages to the investment.
Case Study of a Successful ESG Transition in an SME
An SME that has successfully made a transition to comprehensive ESG frameworks is SELCO India. Their primary mission is to provide sustainable energy solutions to underserved and marginalized communities in rural and urban areas. They specialize in offering solar energy products and services to improve the livelihoods of low-income households and small businesses.
SELCO India took the ESG initiatives and reporting and recognized the importance of formalizing its commitment to Environmental, Social, and Governance (ESG) principles. They began to document and report on their sustainability efforts, highlighting the positive impact they were making on various stakeholders.
Environmental Initiatives: SELCO India focused on providing access to clean and renewable energy solutions through solar power systems. By promoting solar energy adoption, the company significantly reduced carbon emissions and helped combat climate change.
Social Impact: The core of SELCO's business was centered around social impact. They provided solar lighting solutions to rural households, reducing the dependence on kerosene lamps and improving the living conditions of thousands of families. Access to reliable and clean electricity also enabled children to study after dark, leading to improved education outcomes.
Governance and Transparency: SELCO India prioritized strong corporate governance practices and transparent reporting. They maintained a high level of transparency in their financial reporting and operational processes. This level of transparency built trust with customers, investors, and other stakeholders.
Some results and growth by ESG reporting and sustainable practices led to several positive outcomes for SELCO India:
Increased Access to Capital: As the company established its commitment to social and environmental impact, it attracted impact investors and socially responsible investors who were keen to support its mission. This influx of capital helped them expand their operations and reach more underserved communities.
Business Expansion: The growing demand for clean energy solutions and the company's reputation as a socially responsible organization allowed SELCO to expand its reach to new regions and markets within India. They opened new branches and formed partnerships with NGOs and government agencies.
Recognition and Awards: SELCO India received several awards and recognitions for their ESG initiatives and impact on society. This recognition further enhanced their credibility and helped them gain a competitive advantage in the industry.
Job Creation: As the company expanded its operations, it created job opportunities, particularly in rural areas, leading to improved livelihoods for the local communities.
The case of SELCO India exhibits how ESG reporting and a strong commitment to sustainability and social impact can drive growth and success in the SME sector. By addressing environmental and social challenges while maintaining transparent governance practices, SMEs cannot only make a positive difference in society but also attract investment and achieve sustainable growth in their businesses.
The Way Ahead for Indian SMEs
SMEs can follow in the footsteps of SELCO in the following way:
Step 1: ESG Assessment and Materiality Analysis
Conduct an ESG assessment to identify the environmental, social, and governance factors that are most relevant to your SME's operations and stakeholders.
Prioritize these factors based on their impact on the business and the expectations of stakeholders.
Step 2: Setting Clear ESG Objectives and Targets
Establish clear and measurable ESG objectives that align with the company's overall business strategy.
Set achievable targets to address identified ESG issues and continuously monitor progress.
Step 3: Leadership Commitment and Employee Engagement
Secure leadership commitment to incorporating ESG principles into the company's values and operations.
Educate and engage employees at all levels to foster a culture of sustainability and responsibility.
Step 4: Integrating ESG into Business Strategy
Embed ESG considerations into the company's business strategy, risk management practices, and decision-making processes.
Align ESG goals with core business objectives and explore synergies between financial performance and sustainable practices.
Step 5: Compliance and Reporting
Comply with relevant ESG regulations and reporting requirements. Utilizing
Develop a comprehensive ESG report that highlights the company's progress, achievements, and plans.
Step 6: Stakeholder Engagement and Communication
Engage with stakeholders, including customers, investors, suppliers, employees, and local communities, to understand their expectations and concerns related to ESG.
Maintain transparent communication with stakeholders about ESG initiatives and progress, fostering trust and building long-term relationships.
Step 7: Resource Optimization and Efficiency
Implement resource optimization measures to reduce energy consumption, water usage, waste generation, and emissions.
Focus on operational efficiency to drive cost savings and improve overall performance.
Step 8: Social Impact and Community Engagement
Engage in activities that positively impact local communities and society. Support initiatives related to education, healthcare, livelihood, and environmental conservation.
Collaborate with stakeholders and NGOs to enhance social welfare efforts.
Step 9: Supply Chain and Vendor Management
Encourage sustainable practices among suppliers and vendors. Implement criteria that consider ESG factors when selecting and working with partners.
Collaborate with suppliers to improve supply chain sustainability.
Step 10: ESG Risk Management
Identify and mitigate ESG-related risks that could impact the company's operations and reputation.
Develop contingency plans to address potential ESG challenges and crises
Step 11: ESG Incentives and Recognition
Explore incentives and benefits offered by the government or financial institutions to encourage SMEs to adopt ESG practices.
Seek ESG-related certifications or awards to enhance the company's reputation and credibility.
Step 12: Continuous Improvement and Innovation
Foster a culture of continuous improvement and innovation to address emerging ESG challenges and seize new opportunities.
Regularly review and update ESG strategies to stay relevant and responsive to changing circumstances.
Following these steps will ensure that SMEs can successfully incorporate ESG frameworks in their businesses.
By following this comprehensive plan and actively integrating ESG principles into their operations, SMEs in India can gain a strategic advantage, leading to improved reputation, access to capital, customer loyalty, and long-term sustainability.
Conclusion
The climate crisis is real and in the coming years, the world is going to face the brunt of it. Hence, ESG becomes all the more essential as the world needs to adopt cleaner forms of energy to survive. As the world continues to strive toward sustainability, ESG regulations are going to continue to gain more prominence in the future. Hence, businesses need to start identifying and complying with ESG reporting, which best suits their business demand.
The evolution of ESG frameworks is important for companies to learn about. Over time, all ESG frameworks have become more deep and demanding for businesses, which has led to an additional cost attached to them. However, the various frameworks have also ensured that the purpose of ESG implementation is met and the SDGs are more in focus. ESGs have also created a positive impact which has attracted more investments for ESG-focused businesses, which has led to an increase in employment. Whereas, innovation is bringing solutions to businesses and solving complex issues.
ESG could also deeply benefit SMEs as they can reap the benefits of ESG reporting by attaining investments to scale up the business and the benefits of government schemes and incentives. In addition, they can also be champions and serve as successful examples of ESG reporting for businesses all over the world, adding to their prestige and global brand value.
References
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