ESG

Good reasons for adopting ESG Programs are:

• ESG reporting is becoming a mandatory requirement for certain companies (in India, top 1000 companies based on market cap as on 31st March 2022 as per SEBI guidelines).
• ESG-led approach in business makes sound and sustainable financial sense – improved ROI and enhanced profitability – It improves overall rating of the company to have access to the cheaper funds.
• ESG compliance is very important for attracting new investors.  One of the key criteria of new age Fund Managers and Analysts.
• External pressures and preferences of public activism.
• Implementing ESG program and showing sensitivity towards the sustainability issues will convey the commitment towards Planet & People.
• Future readiness – else carrying a much higher risk of sustainable business.

Sustainability in a Triple Bottom Line fashion, the trifecta of people, planet and profits need to be quantified in an organisational setting. The datafication of sustainability through disclosures through various frameworks such as EU taxonomy, SASB, ISSB among others enables measurement and building of institutional capacity that assists stakeholders to gauge performance.

Global Warming and Climate Change is being considered one of the biggest crises of our time. Anthropogenic sources of carbon emissions have brought us to the inflection point where the world needs to arrest emissions to restrict the impacts of climate change. Climate Change is a scalar issue as global phenomena with local ramifications such as floods and droughts. Decarbonisation is the pathway towards achieving a net zero world.

Businesses operate not in a flat world but in a configuration of nodes and networks that make geographically agnostic. However, geographies are embedded with sovereign and international laws which are graded. The labour laws vary between jurisdictions as companies which might be listed in western bourses might source raw materials and finished products from the global south where the implementation of labour laws is far from perfect. Every enterprise which operates in the global market needs to fix this issue to be able to remain relevant in any supply-chain.

Carbon footprint is the total quantity of carbon dioxide (CO2) emissions produced by a person or other entity (e.g., building, corporation, country, etc.). It comprises direct emissions from the production of electricity used to power the consumption of products and services, as well as indirect emissions from the burning of fossil fuels in manufacturing, heating, and transportation. Additionally, the idea of a carbon footprint frequently considers other greenhouse gas emissions as well, like those from methane, nitrous oxide, or chlorofluorocarbons (CFCs).

The term ecological footprint was developed in the early 1990s at the University of British Columbia by Canadian ecologists William Rees and Swiss-born regional planner Mathis Wackernagel, is connected to and evolved from the concept of the carbon footprint. The entire area of land needed to support a certain activity or population is known as the ecological footprint. It includes effects on the environment, such as water use, and the area dedicated to food production. A carbon footprint, on the other hand, is typically measured in tonnes of CO2 or CO2 equivalent each year.

These are gases that could absorb infrared radiation (net heat energy) emitted from the Earth’s surface and reradiate it to the surface, hence enhancing the greenhouse effect, is a greenhouse gas. As far as greenhouse gases go, carbon dioxide, methane, and water vapour are the most significant. (Surface-level ozone, nitrous oxides, and fluorinated gases trap infrared light to a lesser extent).

Any activity that reduces emissions elsewhere to make up for carbon dioxide (CO2) or other greenhouse gases (measured in carbon dioxide equivalents, or CO2e) emissions. No matter where such reductions in emissions take place, the climate benefits from them since greenhouse gases are widely distributed in the Earth’s atmosphere. An activity is deemed “carbon neutral” if carbon reductions equal the overall carbon footprint of that activity. In a carbon market, carbon offsets can be purchased, sold, or traded.  

Read more https://www.britannica.com/technology/carbon-offset

Carbon neutrality means having a balance between emitting carbon and absorbing carbon from the atmosphere in carbon sinks. Removing carbon dioxide from the atmosphere and then storing it is known as carbon sequestration. To achieve net zero emissions, all worldwide greenhouse gas (GHG) emissions will have to be counterbalanced by carbon sequestration. Carbon sink is any system that absorbs more carbon than it emits. The main natural carbon sinks are soil, forests and oceans. According to estimates, natural sinks remove between 9.5 and 11 Gt of CO2 per year. Annual global CO2 emissions reached 36.0 Gt in 2020. To date, no artificial carbon sinks can remove carbon from the atmosphere on the necessary scale to fight global warming. The carbon stored in natural sinks such as forests is released into the atmosphere through forest fires, changes in land use or logging. Therefore, it is essential to reduce carbon emissions in order to reach climate neutrality. Read more at https://www.europarl.europa.eu/news/en/headlines/society/20190926STO62270/what-is-carbon-neutrality-and-how-can-it-be-achieved-by-2050

In India, a listed company must disclose to all its stakeholders, in a corporate responsibility report, the responsible business practices it has adopted. This is significant because these businesses have used public monies, involve matters of interest to the public, and are required to regularly provide thorough disclosures. As a necessary requirement for the top 100 publicly traded businesses, SEBI had established a format for “Business Responsibility Reports” in its circular dated August 13, 2012. The Business Responsibility Report should be used by other businesses to inform their stakeholders. The Annual Report must be filed along with the Business Responsibility Report.  Read more on https://www.bseindia.com/downloads1/BRR_FAQs%2010052013.pdf

This has now been replaced with new reporting format called ‘Business Responsibility and Sustainability Report’ wef FY2022-23 for top 1000 companies based on its market capitalisation.  See more details below.

The Security Exchange Board of India amended the regulations for corporate responsibility reports found in Regulation 34(2)(f) of SEBI-LODR on May 5, 2021. The revised rules now call for ending the present Business Responsibility Report (BRR) reporting after the fiscal year 2021–2022. Based on ESG metrics, the new report is referred to as a “Business Responsibility and Sustainability Report” (BRSR). The format for BRS reporting has been prescribed by SEBI in a notification dated May 10th, 2021. The structure, which is more comprehensive than the BRR format now in use, is also used in conjunction with a guidance note to help organisations understand the extent of the disclosures that must be included in the BRSR. 

Read more on https://rvsbellanalytics.com/what-is-brsr/

The National Guidelines on Responsible Business Conduct (NGRBC) are a set of rules and principles published by the Ministry of Corporate Affairs (MCA), Government of India (NGRBC). The NGRBC has been created to help businesses comply with regulatory standards. 

Read More https://www.indiafilings.com/learn/national-guidelines-on-responsible-business-conduct/

As per Ministry of Corporate Affairs, Government of India, BRSR is a single complete source of non-financial sustainability information relevant to all corporate stakeholders – investors, shareholders, regulators, and the public.

The top 1000 listed businesses in India must report on their business responsibility and sustainability under the SEBI Circular on “Business Responsibility and Sustainability Reporting by Listed Entities” (by market capitalization). A change to Regulation 34(2)(f) of the Listing Regulations, notified on May 5, 2021, has allowed BRSR to become a part of the regulatory provisions. Additionally, the SEBI circular from May 10, 2021, introduced the BRSR format and the guidance note to help corporations understand the disclosures’ scope. The reporting of BRSR shall be voluntary for FY 2021–2022 and mandatory from FY 2022–2023 to provide enterprises time to adjust to the new standards. However, businesses are urged to implement the BRSR as soon as possible to gain an advantage. 

Read more at https://www.mca.gov.in/Ministry/pdf/BRR_11082020.pdf

Three sections make up the BRSR framework are General Disclosures, Management and Process Disclosures, and Performance Disclosures based on principles. BRSR framework is based on 9 fundamental principles of the National Guidelines on Responsible Business Conduct (NGRBC), which concern businesses being ethical, transparent, and accountable, providing goods and services in a sustainable manner, ensuring the welfare of employees – including those in their value chains, protecting the environment and mindful of sustainable production, responsive to all stakeholders, promoting human rights, and adhering to the rules. The BRSR framework gathers data on each of these principles from enterprises.

Read more https://iriscarbon.com/sustainability-reporting-in-india-under-sebis-brsr-framework-a-primer/

BRSR is intended to serve as a single focal point for all non-financial disclosures relating to the company that will enable the stakeholders to understand the approach of the company on different issues such as sustainability, responsible business conduct, manner of dealing with stakeholders, etc.  With only a few weeks left for the onset of FY 22-23, it is time for companies to get into immediate action, as there is evidently a lot of work to be done. 

Read more at: Getting ready to implement BRSR from FY 2022-23 (Part-I). 

Sustainability is often represented diagrammatically.  There are three pillars of sustainability – economic viability, environmental protection, and social equity. Other dimensions could be represented – for example ‘technical feasibility’, ‘political legitimacy’ and ‘institutional capacity’. Our focus in this course is upon the ‘three pillars’. They can help us to look beyond the complexities of contested terms like ‘development. 

 Read more at https://www.futurelearn.com/info/courses/sustainability-society-and-you/0/steps/4618

Sustainability strategy of organizations can be prepared separately from the general corporate strategy or can also be integrated into the general corporate strategy. For both cases it is important that internal and external basic improvement and expectations related to sustainability should be evaluated as important data sources in developing the company strategy. For example, if a decrease is expected by the raw material resources due to climate change, the enterprise should be able to make changes in the purchasing strategy so that these raw materials can be purchased from different suppliers. Another example to this issue could be restriction of sales of some products or increased costs due to changes in legal requirements. In this case, enterprises should be able to adjust their investments and they should be able to make different investments to prevent the possible negative effects of these legal requirements. At present, enterprises are interested in sustainability due to legal arrangements and obligations and at the same time sustainability is recognized as a competition parameter. Companies, which are active in sustainability at present, demonstrate that they can adopt an entrepreneur approach in the future. 

Read more https://www.altensis.com/en/services/corporate-sustainability/sustainability-strategy/

ESG key performance indicators, or KPIs, are quantifiable metrics designed to assist businesses in understanding the effects of their operations on the environment, society, and governance. ESG KPIs are crucial for venture capital and private equity managers to comprehend the ESG impact of the businesses they invest in or are considering investing in and, consequently, the impact of their funds. ESG KPIs also give managers and investors a sense of the risks associated with the investments and funds they are managing. Investors are expecting their GPs to report on these ESG measures more frequently. The capacity of a GP to report on ESG concerns is gradually evolving into a legal requirement, particularly as investors in Europe face rules like the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR). The ability of a GP to report on ESG considerations is quickly becoming a legal essential for many large LPs.

Read more at https://www.allvuesystems.com/resources/a-complete-list-of-esg-kpis-by-industry/

Assets invested according to ESG-related strategies reached $30 trillion in 2018, according to estimates by The Global Sustainable Investment Alliance. This followed a 25% increase to $23 trillion between 2014 and 2016. Moreover, millennial investors are reportedly set to inherit an estimated $30 trillion in wealth in the coming years. A Morgan Stanley study suggests that this group is nearly twice as likely to invest in companies and funds that meet their environmental and social values than the rest of the individual investor population. With ESG investing on the rise, many market participants are exploring the extent to which ESG credentials can affect and explain financial performance, both in terms of corporate earnings and investment returns.

A set of criteria for a company’s conduct known as environmental, social, and governance (ESG) investing is used by socially responsible investors to evaluate possible investments.

Environmental criteria consider a company’s environmental protection efforts, such as corporate climate change policies. The management of relationships with customers, suppliers, employees, and the communities in which it operates is examined under the social criteria. Leadership, executive compensation, audits, internal controls, and shareholder rights are all topics covered by governance. 

 Read more at https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp

ESG score aims to grade corporations on their ESG initiatives since ESG has become a focus for both investors and businesses. An ESG score indicates a company’s capacity to uphold its ESG obligations, performance, and risk exposure, much like a credit score or bond rating. ESG scores are assigned by third-party suppliers and computed using several ESG parameters. Each of these groups rates organisations based on a unique set of standards.

ESG reporting is the disclosure of environmental, social, and corporate governance data. As with all disclosures, its purpose is to shed light on a company’s ESG activities while improving investor transparency and inspiring other organizations to do the same. Reporting is also an effective way to demonstrate that you’re meeting goals and that your ESG projects are genuine — not just greenwashing, empty promises, or lip service. Since ESG reports summarize the qualitative and quantitative benefits of a company’s ESG activities, investors can screen investments, align investments to their values, and avoid companies with the risk of environmental damage, social missteps, or corruption.  

Read more at https://www.wolterskluwer.com/en/expert-insights/the-abcs-of-esg-reporting

ESG analysis can provide valuable insights about factors that can have a significant impact on the financial metrics of a company and therefore better inform our investment decisions. ESG analysis can be complex. When taking ESG considerations into account, it is not just a case of evaluating the products and services provided by a company, but also its behaviour, conduct, supply chain and other considerations in running the business. ESG analysis must also consider the future, considering not only a company’s latest ESG disclosures, but also its strategy, overall impact, and evidence that it is keeping to its commitments and standards. Hence, we believe it is not advisable to formulate investment decisions based on purely backward-looking historical data and believe a more forward-looking, dynamic approach is needed when considering ESG risks and opportunities. 

Read more at https://www.janushenderson.com/en-gb/investor/article/what-is-esg-and-why-do-we-care/

It is true that sustainability goals and thus also environmental, social and governance (ESG) principles have already been increasingly pursued in global capital investments in recent years. Despite the rapid growth of this global phenomenon, many issues remain to be addressed by the financial sector, as standards for ESG investments have not yet been fully defined by regulators and investors. Financial institutions should start to assess the implications that ESG factors may have on their business model and core operations to map and prioritize the key functions to be addressed (e.g., investment processes, product governance, risk controls, etc.) based on already publicly available regulatory guidelines and market trends. 

Read more at https://www.bankinghub.eu/topics/esg-financial-sector

In the financial world, disclosure refers to the timely release of all information about a company that may influence an investor’s decision. It reveals both positive and negative news, data, and operational details that impact its business. Similar to disclosure in the law, the concept is that all parties should have equal access to the same set of facts in the interest of fairness. The Securities and Exchange Commission (SEC) develops and enforces disclosure requirements for all firms incorporated in the U.S. Companies that are listed on  the major U.S. stock exchanges must follow the SEC’s regulations. 

Read more at https://www.investopedia.com/terms/d/disclosure.asp

In a word: fairness. The purpose of financial disclosures is to level the playing field for investors. With a clear view of a company’s financials, strategy, and direction, investors have access to information that will help them make informed investment decisions. Securities regulators have requirements for when and how information must be disclosed. This is to help provide investors with timely and accurate information. Most disclosure documents must be filed with securities regulators. Some disclosure documents for investment funds do not have to be filed but must be posted on the fund’s website or sent to investors free of charge. Examples of these documents are the quarterly portfolio disclosure and annual proxy voting records. 

Read more at https://www.wolterskluwer.com/en/solutions/cch-tagetik/glossary/disclosure-reporting

Integrated Reporting brings together material information about an organisation’s strategy, governance, performance, and prospects in a way that reflects the commercial, social, and environmental context within which it operates. It leads to a clear and concise articulation of your value creation story which is useful and relevant to all stakeholders.  But it’s not only about reporting; Integrated Reporting encompasses Integrated Thinking.  It is as much about how companies do business and how they create value over the short, medium, and long term as it is about how this value story is reported. 

Read more at https://www2.deloitte.com/uk/en/pages/audit/articles/integrated-reporting.html

The Financial Stability Board (FSB) established the Task Force on Climate-Related Financial Disclosures (TCFD) in 2015 to develop uniform climate-related financial risk disclosures for use by businesses, banks, and investors in informing stakeholders. The financial system will be more stable, there will be a better understanding of climate risks, and it will be easier to finance the shift to a more sustainable and stable economy if there is more accurate information available on how exposed financial institutions are to climate-related risks and opportunities.

 For more information, please refer : https://www.fsb-tcfd.org/press/tcfd-report-finds-steady-increase-in-climate-related-financial-disclosures-since-2017/

Scenario analysis, a key recommendation of the Task Force on Climate-Related Financial Disclosure (TCFD), allows a company to understand and quantify the risks and uncertainties it may face under different hypothetical futures. It helps in decision making and allows businesses to shape their strategy. Performing scenario analysis can be a challenging and demanding task due to the complexities that it carries. As scenario analysis is highly analytical and modelling-based, the commitment and involvement of finance teams from the outset is critical. Finance teams bring the skillset that is required to understand the modelling process and help businesses embed and translate the scenario analysis outcomes into strategic decisions. 

Read more at https://www.accountingforsustainability.org/en/knowledge-hub/guides/tcfd-climate-scenario-analysis.html

Formerly known as the Carbon Disclosure Project, CDP is an international non-profit organization based in the United Kingdom, Germany, and the United States that helps companies and cities disclose their environmental impact. CDP’s goal is to make environmental reporting and risk management a business norm that drives disclosures, insights, and action towards a sustainable economy. When they started in 2002, CDP had just 35 investors signing its request for climate information and 245 companies responding. In 2020, a record-breaking 9,600+ companies disclosed through CDP, 14% more than last year and 70% more than when the Paris Agreement was signed. The collection of self-reported data from the companies is supported by over 800 institutional investors with about US$100 trillion in assets. In fact, nearly a fifth of global greenhouse gas emissions are reported through CDP. This information helps investors, corporations, and regulators to measure and understand the environmental impact of their decisions and take steps to address and limit their risk to climate change, deforestation, and water security. 

Read more https://www.gobyinc.com/what-is-cdp-reporting/

With over 9,600 companies on board, CDP holds the world’s largest and most comprehensive dataset on environmental action. The insights gathered by CDP are crucial for incentivizing and tracking the global progress toward a zero-carbon, water-secure, and deforestation-free world. Companies can disclose information through CDP’s three corporate questionnaires on climate change, water security, and forests. This helps companies provide environmental information to their investors, customers, and other stakeholders, including governance and policy, risk and opportunity management, and environmental goals and strategies. Investors and customers may both request environmental information from companies via CDP, and the data is used by these stakeholders to inform decisions and drive action.

Read more at https://www.gobyinc.com/what-is-cdp-reporting/

Driving positive ESG performance and reporting confidently on it demands that your organization has the tools and knowledge needed to transform your ESG commitments into action. You need to turn objectives into achievements via a fully integrated ESG strategy — and then find ways to measure your progress.

The board, management and operational teams need to collaborate to devise these measures, making them relevant, tangible and, importantly, feasible.

You can seek help to comply with standards and regulations; implement and evaluate risk controls and monitor external intelligence and competitor insight. All of which will enable you to embed ESG into your business and measure ESG performance, quantifying the impact of your initiatives.

ESG implementation program consist of the following steps and check points:

1. LEADERSHIP

2. GOALS

3. FRAMEWORKS

4. DATA

5. TECHNOLOGY

6. REPORTING

Let’s talk a little more about each of these steps for a quick understanding.

1. Leadership:

Adoption and implementation of ESG program should be regular board agendas. Setting objectives and taking responsibility for achieving ESG goals have become an integral part of the board’s role.

A successful ESG program requires company leadership to integrate it across company’s business strategies and its operations. This initiative must start at the board level and then flows to senior executives, then down to leaders across the company. 

The key elements for the right leadership: 

Key steps and checks:

• integrate ESG program with the overall business strategy of the company
• to set up an ESG Committee, with a clear charter defining its role, goals, and responsibility. 
• committee to engage with senior leadership and draw an action plan
• putting these goals into action through several initiatives
• engage with middle management teams where they should also feel the ownership of the ESG goals
• employees live out ESG goals in their day-today work — e.g., hiring, operations, reporting etc.

2. Goals:

Leadership must be clear in what they’re trying to achieve from ESG program.  Each company will have different ESG goals based on their priorities, as well as the unique circumstances of their industry. For example, highly polluting industry may have ‘E’ as their top goal.

Initiating the ESG goal setting process by the boards and leadership team will send the right signals to investors, stakeholders, and regulators even at a time when it is still evolving or ESG reporting is still not mandated to all the companies (applicable to only top 1000 market cap companies as on 31st March 22). 

Key steps and checks:

• what to achieve with an ESG program goals
• clear direction for achieving the goals
• ESG goals aligned with the industry standards
• ESG goals meeting with the regulatory requirements
• mechanism for reporting – communicating goals to stakeholders

3. Framework:

SEBI has prescribed the reporting format and certain guidelines for reporting for certain size of companies wef 1st April 2022 but going to be mandatory for all in time to come.  Please refer Annexure 1 for applicability.  

Besides SEBI prescribed reporting format and guidelines, globally, there are five commonly mentioned ESG reporting framework and standards:

• CDP (known as Carbon Disclosure Project)
• GRI (Global Reporting Initiative)
• SASB (Sustainability Accounting Standards Board)
• TCFD (The Task Force on Climate Change)
• IR (Integrated Reporting)

Out of S&P 500 companies (USA), some of them have fully adopted the framework and some partially adopted, and few of them used the framework as a reference point when determining what information to include in their ESG reporting.  There are companies who have used mix of these frameworks and created specifically of their own.  An enterprise should adopt good and suitable practices from the various available frameworks across the globe that is best aligned with its ESG goals and regulatory requirements.

Below image shows the reporting standards by the companies from the list of S&P500: 

The key elements for selecting a suitable framework are: 

• adapt & adopt framework out of several frameworks available
• keep updating with evolving regulations
• select as prescribed by the regulatory requirement 

Quick steps and checks for the selecting the right framework are:

• milestones to measure the success of ESG goals
• translating existing ESG initiatives into an actionable, reportable format
• suitability of the framework – good governance, environmental impact, and social progress
• mapping process of ESG activities with standards
• updating process with the latest requirements, including new mandates and the standardization and consolidation of frameworks

4. Data:

To assess ESG data needs, start with the ESG goals of the organization, as well as the frameworks selected. 

Given the evolving nature of ESG regulations and rapidly changing priorities, it needs to be made sure that it has a process that keeps the data relevant and collected timely. 

Key issues while setting up a good data collection system are:

• process of collecting and aggregating data from across the enterprise
• data collection tools aligned with the tools used by investors 
• process of sharing ESG progress with – Regulators, Investors, Customers, Suppliers, Potential Hires etc.
• tracking and benchmarking the progress in the industry/competitors/peers
• process of keeping aligned with regulatory developments
• keeping on watch the stakeholder sentiments

5. Technology:

Right Technology can aid ESG processes in several ways. ESG remains complex and full of variables when it comes to tracking, monitoring, reporting and compliance. Technology can help in tracking progress against ESG standards and frameworks, as well as automatically updating compliance dashboards when new regulations arise.  

Steps and checks for selecting the right technology are:

• data collection process from multiple sources, and mapping and reporting it   for multiple frameworks or multiple levels within a framework
• addressing the changing regulations and stakeholders’ requirements
• enhances the visibility and collaboration across departments
• working across multiple frameworks and systems
• technology solution backed up by robust service and support

6. Reporting:

The reporting process should be a seamless extension of the overall ESG Program. 

ESG reports should meet the regulatory compliance, stakeholders’ expectations, reporting deadlines and company’s commitments.  

Key initiatives are:

• go above and beyond the regulations and assume ‘leadership’
• start reporting even if not mandatory for all

Quick steps and checks:

• create dashboards to make data easy to consume and act upon
• include a robust audit trail, with all changes and values tracked throughout
• seamlessly integrate into the business strategy 
• program it with governance and risk and compliance