Wednesday, May 29
ESG: The Importance of Environmental, Social, and Governance Factors in Investing

ESG: The Importance of Environmental, Social, and Governance Factors in Investing

From CSR to Corporate Sustainability to the acronym ‘ESG’(environmental, social, and governance) which was coined in 2005, it has become important for organizations to maintain their ESG status.

When I was part of the Tata group as part of the Business Excellence team at Tatanet, Corporate sustainability was a new concept. Many organizations — it is still a part of PR, and a tool to showcase that you are concerned about people and planet, before looking at profits. I recall one of my conversations where I was told by the COO that all this is good to talk, only when the organization is actually having a good bottom line.

Come in 2022, ESG is a big ticket item, where organizations of different shapes and size look at improving the ESG. As per Mondaq news, ESG investing also becomes very important in a fast-growing economy like India as it allows the government, investors and companies to build a sustainable business economy. The Securities and Exchange Board of India understood the rise and importance of ESG investing in India and thought it necessary to incorporate sustainability reporting by corporates on par with financial reporting. This would ensure the adoption of ESG as a metric to evaluate corporate performance.

SEBI vide Circular No. SEBI/HO/CFD/CMD-2/P/CIR/2021/562 dated 10th May 2021 (“SEBI Circular”) has replaced the earlier Business Responsibility Report (“BRR”) with the new Business Responsibility and Sustainability Report (“BRSR”). BRSR is applicable to the top 1000 listed companies by market capitalisation and has become mandatory from the financial year 2022-23.

Globally too, ESG has been rising which is seen by the kind of inflows into the sustainable fund. Midway through 2022, global sustainable assets were about $2.5 trillion. With COP 22 summit in Morocco, what was deliberated was on how to combat climate change and implement those plans. The thrust definitely has been on climate change. But the social dimension is rightfully getting its focus back. First with COVID and then with Ukraine war crisis, ESG is definitely very relevant in today’s context.

The environment factors would cover—pollution, climate change, waste management, bio-diversity—there will be no business if there is no earth to live. Social aspect would include – social aspects, community initiatives, labour compliances, safety and hazards etc and Governance would incorporate ethics, government regulations, data security, risk mitigation etc.

With all this in perspective, the questions still remain on the relevance of ESG and what if ESG focus is not there.

If we try to list the criticism of ESG into different buckets.

If you need some ideas about what to read next, here they are: 


    • ESG is more of a headache—you need to focus on profits

Businesses most believe is for profits and you cannot sustain, if you run into losses, then ESG has no relevance. In this context, ESG becomes more of a PR tool, where organizations can showcase how much good they have done to the society and earn some brownie points for the brand. Many a times the shareholders are more interested in the profits and the dividends that they receive and not what kind of ESG score they receive.

  • ESG is academic and difficult to implement

It is academic to understand and meet the technical requirements of Environment, Social and Governance parameters. It becomes more like a check in the box. Compare it with something like ROI or Gross Margins or Profits, you have clear agenda for sustaining the organization. So the ESG points (dollars) or score or money earned, there is no clarity on who gets the redemption—customers, employees or shareholders?

  • ESG is not easily measurable

Yes, all the factors of E,S and G—scores can be arrived at, but when you combine them and arrive at an aggregate score, with various ESG ratings, it becomes like a compass without direction.

Some ESG ratings firms used to create ESG funds or referenced in the press include:

  • MSCI. MSCI publishes ESG ratings on 8,500 companies (14,000 issuers) globally, and employs over 200 analysts. …
  • ISS ESG. ISS ESG publishes ratings on 11,800 issuers and 25,000 funds.
  • Sustainalytics
  • Refinitiv
  • FTSE Russell

Moreover, major investors try to use their own methodologies that draw from a variety of inputs (including ESG scores), each claiming to be the best.

  • ESG is difficult to co-relate with the financial performance

As mentioned in point #3, if there are various options available for ESG ratings and methodologies, different countries, different industries adopting different ESG ratings, it will be difficult to have a direct co-relation for the cause and its impact on the Company financials. So, if you look at heavy industries and conventional industries which generate employment and livelihood for a larger section of society will comparatively have lesser ESG ratings compared to technology and asset light companies because of factors like carbon foot print.

  • Do we have enough ESG professionals?

In a mature ecosystem getting the right kind of people to drive ESG is a herculean task. From mere collection of ESG Data the requirements is becoming complex by the day. Dealing with multiple stakeholders, ever changing regulations, capital allocation, the job requirements of today’s ESG professionals is complex and mazy.  are diverse. More than training team on technical, actual implementation is a complex. A person needs to understand the basics of the business to improve the ESG performance of the organization.

With all this in perspective and in the background of Ukraine-Russia conflict, it has  has exposed the world to energy security issues seeking global collaboration. A True ESG would be something which makes the organization sustainable on a long term basis. Organizations have become sensitive and many have closed their operations/business in these countries compromising on profits while focusing on the safety of employees. Yes, with all the challenges, ESG is relevant and important more so in present in the VUCA world.

Ramdas Shenoy is Director at GetSet Labs, Director at Blue 24 Media and Marketing Solutions and also associated with Soul Catalysts Business Series. He is Founder of Media portal

#ESG #SoulCatalystsBusinessSeries

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