by NAWSHIR MIRZA,
Professional and experienced Independent Directors

About 20 years ago a group of global financial institutions issued a report titled “Who Cares, Wins”. The report identified three elements to ensure long term sustainable businesses. The three elements were the environment, society and corporate governance - ESG. This was the time when the concept of stakeholders in business was beginning to gain strength. You will see that the environment and society are stakeholders in businesses whereas governance is the process by which an organization is governed and, in a business context, is the process by which those in charge of a business address the interests of the stakeholders in it. 

A great deal has been written and discussed about corporate governance in these 20 years. In our own country, a new companies act was introduced in 2013 which for the first time made the balancing of stakeholder interests as the principle purpose of a company. I do not propose to spend time on the G in ESG because of the considerable attention it has already received.

A business has several stakeholders. Why then did the aforementioned report refer to only two of them - the environment and society? Other stakeholders have a contractual relationship with a business but these two stakeholders have no such relationship and must rely upon the laws to protect them from the negative effect on them of a business’s activities. If the laws are not comprehensive, the stakeholders are left at the mercy of a business. The report pointed out the need for businesses to assess their impact upon these two stakeholders’ interests over and above what the law mandated.

A couple of years ago the government has mandated the reporting of a business’s impact on various stakeholders including society and the environment. This is called the Business Responsibility and Sustainability Report - BRSR. It is a comprehensive document requiring measurement of such impacts for different stakeholders on various parameters. Financial statements measure the impact of a business’s performance on financial stakeholders - shareholders and lenders. BRSR measures the impact on non-financial stakeholders such as employees, customers, vendors, government, society and the environment. Globally too international standards are being developed by the International Sustainability Standard Board. Just as companies use their financial statements to set targets for their financial performance, I would advise management to set targets for each of the items that are measured in the BRSR report.

SOCIETY - while the BRSR report has various measures for assessing social impact, there are certain critical aspects that the report may not address but that require the attention of any responsible management. I provide a few illustrations –
 

• Does your company treat contract workers differently from employed workers? Does it implement processes for detecting forced labour or child labour as rigorously in its contract workers as it does in its employee workers? Is the practice of OHS for contract workers less rigorous than it is for employee workers?
   
• When a business enters a new local economy, does it assess the impact on the economy of its entry? How does its entry disrupt a settled economy? Is any segment of the local population being harmed by that disruption?
   
• Does the company manufacture products or provide services that are either dangerous or without sufficient safety precautions?
   
• Does the company buy its raw materials from exploitative regimes?

ENVIRONMENT – Of all stakeholders the environment is now the most critical. On virtually every parameter - biodiversity, chemical and plastic pollution, climate change, nutrient pollution, forest cover, freshwater consumption, aerosol pollution and ocean acidification - we have exceeded the planetary boundaries. In other words, the damage we are doing to the environment through each of these malpractices is far greater than Nature’s ability to regenerate itself. If we continue down this path, we stare at the horrendous prospect of extinction of the natural world that we currently live in. Will human beings survive such a disaster? A couple of years ago the Secretary General of the United Nations warned “it is code red for humanity”. In the 4.5 billion years since the formation of the Earth and in the 800 million years since animals first appeared on it, there have been six major extinction events (in which over 75% of species then living ceased to exist). The dinosaurs that lived for one 165,000,000 years were wiped out within a few thousand years. Trilobites that lived for hundreds of millions of years no longer exist. No living creature can escape its environment. It is now universally acknowledged that in the 200 years since the industrial revolution the earth's environment has changed more and faster than it has changed in 1,000,000 years. In comparison, humans have been around for only 800.000 years. One would expect that intelligent beings such as ourselves would be doing everything in their power to avoid becoming extinct. Why then is so little being done to avert a looming disaster? 
 

• The Tragedy of the Commons – this concept states that any resource to which many people have unregulated access will be over exploited because own self-restraint by a few will not result in a general reduction in the exploitation. Without enforcement, the resource will continue to be exploited until it is fully exhausted. The environment is a global resource and regulating its use would require the cooperation of many societies and governments. Hence, no tangible action has been taken.
   
• Human beings have a natural tendency to discount future negative events for immediate gains. The extinction of human beings in the future is a far lesser concern then the impact of a reduction in consumption. Any reduction in consumption would lead to less prosperity, less hedonism, less employment, lower tax revenues and so forth. The aversion to suffering immediate negative impacts overwhelm a far graver negative impact because it is in the future.
   
• Capitalism - There are two principle methods by which destruction of the environment can be reduced. The method that has received all the attention is mitigation of the impact of the supply side. That is, how can goods and services be produced with a reduction of environmental impact. This keeps the focus upon the producer and, by inventing machines and methods for the mitigation of negative impacts, it provides business opportunity for their producers. The rationale is that now that the focus on the environment cannot be avoided, how can the businesses (supply side) overall benefit? 

But, there is a second way to reduce environmental impact - addressing the demand side. In other words, discouraging people from consuming more goods and services. But you will not see any corporation asking its customers to use less of its goods and services. The reason for this is obvious. So, we are behaving like the driver of a car which is hurtling towards the edge of the cliff who only taps the pedal brake and refuses to apply the hand brake because he wants to enjoy the sensation of speed for as long as possible.

WHAT SHOULD YOU DO? 
As managers, you have to approach the Environment and Social impact issues from two directions:
 

• The impact of your business on the Environment & Society. Mitigating the negative impact and maximising any positive impact is a responsibility for every business. They should determine this responsibility under four heads:
   
  • How is the company managing the risk of negative impacts?
     
  • Does the response to such risks require a change in the strategy?
     
  • How will the governance processes capture these risks and monitor them?
     
  • What matrices will be used for measuring the risks and the progress towards mitigating them?
    
     
• The impact of the Environment and Society on your business and others. Managerial response to this impact is a major element of any risk management process. It can be grouped under five heads:
   
  • The potential response of government to mitigate this impact. Response could include controlling the damaged that your business is doing to the environment.
     
  • The impact on your business’s reputation from what is perceived as its harmful behaviour.
     
  • The resultant changes in your markets for your goods and services.
     
  • Impact of environmental changes on the technology you use both, for manufacture of your goods and on the efficacy of the products you make.
     
  • The chronic and acute risks that your assets may be exposed to.

I would suggest that a questionnaire be prepared suited to your business covering all the above points. The questionnaire should be circulated amongst your managers and key stakeholders to obtain their views on each of the above broad issues. Collating the views would provide you with a crowdsourced assessment of what your business needs to do. Because the impacts will differ upon the time frame, the responses to each question should be required for the near term, the medium term and the longer term.