Circling to Land: The messy reality of ESG
The appeal for the environmental, social, and governance (ESG) movement is growing fast. As a result the key investors, and the companies they hold in their portfolios in, are required to rethink the risks of traditional business models, and the opportunities for more sustainable value creation in the future.
It is being observed that the commitment on the part of companies is quite high for implementation and adoption of ESG aspects for their alignment in strategy, although the commitment alone is not going to have realistic results in absence of lack of detailed understanding of what to do and how to deal with it. Sincere efforts on the part of companies and also by the governance professionals is going to be very crucial for the attainment of the desired objectives.
Further, on the ESG aspects, the importance of information and data requires substantial appreciation. The requirement of uniform and reliable flow of data in respect of these issues need to be embraced for helping the investors to support the right set of companies who pace impetus on the quality of the information and its transparent disclosure to invests for its evaluation. Transparency on the company specific ESG priorities, including information on the carbon emissions of their investments etc is of significant use to the investors. Investors expect ESG policies to be tied to strategy and, increasingly, consider ESG risks and opportunities as integral to their capital allocation decisions. The corporate boards should be prepared to discuss their corporate purpose, sustainability and ESG stories in various board meetings.
It is further to be understood that coping strategies being followed by western companies may not be a perfect modal for Indian companies in many ways considering the uniqueness of the India corporate eco-system. ESG is vast term focussing a number of aspects companies come across for its entire value chain. The aspects could be with reference to the local expectations / requirements, geography, social issues, natural resources, dependency on import for energy security etc to formalize effective ESG strategy. Directors must demonstrate serious interest in seeing regulatory leadership in the development of an ESG disclosure system that is consistent for all public companies. Until one is established, disclosures surrounding ESG will continue to evolve and vary based on company size and sector.
Further, companies are required to identify risk and opportunities related to ESG and a comprehensive review of financial performance, risk management, supply chains, increased revenue potential and competitive differentiation. And then Boards should consider whether a standalone committee dedicated to ESG should be created or if existing committees should be assigned oversight responsibilities. It’s important to note that the management team is ultimately responsible for ESG and for communicating the company’s plans, metrics and actions; the board’s role is to validate and oversee the metrics.
