What Is ESG? And Why Does Corporate India Need It?

Rising temperatures, climate disasters, the Covid-19 pandemic – the daily news cycle serves up constant reminders of how precariously close we all are to the point of no return.  However, as the Covid-19 lockdowns taught us, a healthy and growing economy is also critical for survival. Is there is a middle ground? If we have to thrive as a species, then there has to be a middle ground. ESG metrics or Environmental Social and Governance is an attempt to merge the demands of the economy with the need of the planet.

ESG is about bringing the focus of business activities and decision-makers to the criticality of climate change and sustainability. It is about holding businesses accountable through investor actions.

What is ESG?

ESG is often used interchangeably or confused with sustainability or CSR activities; however, the term ESG is broader; encompassing all the activities undertaken by corporates in the realm of sustainability, social impact, internal and external community engagement, as well as best practices and policies that govern the workings and culture of the company.

“ESG criteria are a set of standards for a company’s operations that investors can use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.”

(Source: www.investopedia.com)

“At MSCI, we define ESG Investing as the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.”

Remy Briand, Managing Director, MSCI ESG Research

“Environmental, social and governance (ESG) refer to a collection of corporate performance evaluation criteria that assess the robustness of a company’s governance mechanisms and its ability to manage its environmental and social impacts effectively. Examples of ESG data include quantifying a company’s carbon emissions, water consumption or customer privacy breaches. Institutional investors, stock exchanges and boards increasingly use sustainability and social responsibility disclosure information to explore the relationship between a company’s management of ESG risk factors and its business performance.”

(Source: Gartner)

You can find more details of what makes up the E, S and G factors in the video here.

Why Does ESG Matter?

The principle of investing your money in alignment with your beliefs is not new. Socially responsible investing in its modern form has existed since the 1960s, and the concept goes back centuries. ESG is its 21st-century avatar!

This time around, it is backed by the investor heavyweights AND the public, giving it real power to bring about lasting (and much needed) change. However, every change needs some sustained push, pulls and prods from various directions to become the norm. This holds true for ESG as well; its Goodness is no guarantee for its uptake. 

The Carrot and The Stick

The ESG Carrot: Money. Lots of it!  

According to Bloomberg, global ESG assets are expected to cross $53 trillion by 2025; that is over a third of the $140.5 trillion in projected total assets under management. 

Naturally, for any business –  big, small or medium – being eligible to get a piece of this massive pie HAS to be a priority. Europe and the US are home to most of this investment money, but Asia is expected to come up on the next wave of growth.

In India, the ESG wave has been gathering speed for some time; inflows in ESG mutual fund schemes in India have increased by 76% in 2021, growing from Rs 2,094 crore to Rs 3,686 crore in the time period 2019-20.

The ESG Stick: Customers and Controllers

There is clear interest from Indian asset management companies (AMCs) in following ESG ratings and factors. However, the clear and obvious challenges of the Indian business ecosystem might have held back ESG adoption if it wasn’t for SEBI. SEBI’s circular on Business Responsibility and Sustainability Reporting or BRSR makes it mandatory for the top 1000 listed companies (by market capitalization) to comply with its ESG requirements from FY 2022-23.

And then there is the ultimate stick, the customer. The customer is king, and the king demands change. Real, quantifiable change. According to Cone Communications, 94% of Gen Z believe companies should address urgent social and environmental issues; 87% of millennials agreed. They want to buy from responsible brands, and they want to work in GOOD companies. Coming on the tail of a crushing pandemic and staring at spiralling climate challenges, people are no longer willing to put up with half measures. 

The Bottomline

The corporate landscape and the global economy are responding to all these urgent drivers, helping ESG become the default. Ultimately, the success of ESG metrics are linked to money – sustainable, well-run, good companies are stable, they keep their customers loyal, the regulators and the government happy and they provide high returns to their investors.

It’s a win-win-win, and the biggest winner is our planet and its people!