Major institutional investors recognise the impact of ESG on the long-term viability of companies and are increasingly integrating ESG topics in their investment process, pushing companies to disclose their ESG-related risks. Countries worldwide are also compelling companies and financial institutions to mandatorily report their climate-related risks. SEBI (Securities and Exchange Board of India) published a consultation paper on Environmental, Social and Governance (ESG) Rating Providers for Securities Markets stating that “there is pressure on companies to focus on integrating ESG in their business practices and there is an increasing expectation that companies would transition towards environmentally, socially and economically sustainable business activities.” This is in line with observations made by the World Economic Forum where climate-related matters make up the bulk of their list of 2021’s world’s greatest threats. Environmental risks such as extreme weather, climate action failure and human environmental damage remain amongst the greatest threats to the world, by both likelihood and impact.
While the advantages of a robust corporate ESG programme are undeniable, Indian companies face a string of challenges in building one.
1. Are Indian companies identifying the appropriate material issues that are most relevant to their stakeholders?
ESG issues vary by industry and company. Companies should focus on material issues that directly affect their stakeholders, impact society, and contribute to the bottom line. A materiality assessment conducted by assessing the requirements of a broad range of stakeholders will provide the blueprint for an organisation’s ESG strategy going forward. Once these material issues are identified via stakeholder engagements, organisations must create a cohesive ESG strategy, set smart goals and implement initiatives to meet set goals. This strategy needs to be enforced by leadership through management by motivating them to incorporate it in daily operations. Organisations would benefit from creating an independent ESG committee focusing on ESG issues, risks and opportunities. Once the strategy and its implementation roadmap are in place, it is critical to enhance stakeholder communications by tailoring it to provide each stakeholder group with the information and updates they seek.
2. Are Indian companies able to collect data required to report on key material topics?
Data is an integral aspect of how an organisation tracks and reports on ESG issues. The lack of standard rules for reporting is often brought up as a barrier in identifying the data that is required to make impactful disclosures. Once the material issues have been assessed, key performance indicators must be recognised and the sources for data should be identified to assess these indicators, both internal and external. The data also requires maintenance – updates to the data to ensure it stays relevant, which is a continuous process. It is important to align all business units to gather, monitor and update ESG data. Many companies find it difficult to collect, collate and update detailed ESG data in their areas of operations, especially when it comes to collecting quantitative data on emissions such as Scope 3 emissions, which is dependent on gathering information from upstream and downstream sources outside the control of the company.
This point was further emphasised in an internal study conducted by SG Analytics where publicly available ESG data for key ESG KPIs were researched for some of India’s largest listed and unlisted companies including some very well-recognised and established unicorns. It was found that only 20% to 30% of data for key ESG KPIs was publicly available.
3.Can small and mid-size Indian businesses absorb ESG-related costs, especially after the pandemic?
There is a thought that only bigger companies with deep pockets can participate in ESG reforms because of the costs associated with integrating and reporting on ESG topics. With companies still battling the effects of business interruptions caused by the pandemic, Indian businesses are struggling to cater to the ESG demands of their stakeholders in the absence of dedicated, well-
staffed and appropriately trained ESG departments. Costs to integrate ESG into their operations and report relevant ESG information can be disproportionately larger for smaller companies or less mature companies that are still in the process of developing their businesses and often have scarce resources. New disclosure requirements such as BRSR (Business Responsibility and Sustainability Report), mandatory for top 1000 listed companies by market cap from the financial year 2022-23 and voluntary for others, can cause companies to incur new costs and will burden them in collecting, collating, calculating, and presenting the new information. Additional costs to conduct audits and assurances of the disclosed data must also be considered.
4. Do Indian companies have access to the right set of skilled ESG professionals?
There is no doubt that ESG is maturing in India, and finding qualified people is becoming harder. ESG in India is growing at a much faster rate than many had foreseen. Earlier where just collecting ESG data for reporting and communication purposes was the requirement, today’s corporate ESG requirements are more complex. From dealing with multiple stakeholders and keeping up to date with the changing regulations to driving capital allocation, the responsibilities allocated to today’s ESG professionals are diverse. Training employees on technical aspects of ESG and providing ESG education for the management are not enough. To kickstart their ESG programs, companies should have access to a vast pool of skilled ESG professionals capable of working within the confines of sustainability viewed from an operational perspective. Professionals need to understand the nuts and bolts of the business to provide the appropriate solutions for improving the ESG performance of a company. The availability of such skilled ESG professionals in large numbers in India is still a question. Simply, there are not enough skilled ESG human resources, especially those required to transform the ESG performance of a company.
ESG preparedness will continue to be a significant driver of stakeholder satisfaction, whether it be investors, regulators, customers, or employees. While Indian organizations can no longer ignore the important role that ESG plays in creating long-term value, it is paramount that they overcome these hurdles to stay in step with the everchanging ESG landscape.