In an interaction with Urvi Shrivastav, Editorial Lead, BE ESG, BW Businessworld; Sankar Chakraborti - Chairman, ESGRisk.ai, and Group CEO, Acuité speaks about ESG parameters employed by companies today and reporting the same.
What are the ESG parameters companies use today?
Companies while adopting ESG practices are a combination of business priorities and stakeholder priorities, via materiality mapping. The global and Indian reporting standards, such as GRI, BRSR, etc., include all the ESG parameters In the environment category, companies report on various polices and initiatives taken by them, on the material issues of energy, waste, water, biodiversity management and waste management efficiently. In the social category, companies take initiatives around CSR spending and activities, diversity and inclusion, employee training & development, occupational health & safety, data privacy and security, and supply chain and procurement practices. Governance being a sector agnostic parameter, it is mandatory for the companies to follow corporate governance compliances such as SEBI-related guidelines and Companies Act 2013 related to various committees, board independence board and management structure and must include various details about the composition of the board.
What are the reporting mechanisms?
One of the most accustomed reporting mechanisms followed in India is the Business Responsibility and Sustainability Report (BRSR). In May 2021, SEBI issued a mandate for the top 1000 companies which are ranked by market capitalisation, to include BRSR in their annual report, which is then disclosed to stock exchanges and to the company’s stakeholders. The BRSR is a departure from the Business Responsibility Report (BRR) introduced in 2012 as it is more granular as compared to the BRR disclosures.
The global reporting mechanisms include Global Reporting Initiatives (GRI), the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainable Development Goals (SDG) and the Ten Principles of the United Nations Global Compact. GRI is a common language for organizations and stakeholders, with which the economic, environmental, and social impacts of organizations can be communicated. Similarly, TCFD helps companies, banks, and investors in providing information on climate-related financial risk disclosures to its stakeholders.
Why is it important?
Environmental, Social and Governance (ESG) is a practice that helps to integrate sustainability or corporate responsibility, focusing on the impact on the environment and wider society into business operations. ESG reporting is a mechanism for companies to disclose their operations which are focused on creating a positive change that aligns to their values and goals. Investors as well as lenders have a growing interest in sustainable companies. Integrating ESG into business operations and reporting policies and initiatives is an effective tool to attract investors with aligned interests. Additionally, customers also expect companies to protect the environment and contribute towards society, thus prefer brands that align with their belief systems.
What are the issues around ESG reporting?
There are several issues around ESG reporting due to the haste adoption of ESG. The 3 main challenges are:
a. Standardisation - Primarily, companies are unsure about which ESG reporting framework suits their business. This arises due to the wide range of global ESG reporting frameworks which are being followed by different industries. While GRI helps businesses in understanding and communicate their impact on sustainability issues, TCFD aids in disclosing climate-related risks.
b. Whitewashing – Each industry has different materiality for each ESG key issue. Thus, reporting the correct data is important to reflect a good overall ESG performance. Along with this, disclosing the data in the right way to meet the requirements of the reporting standards is important. Reporting only the positive indicators is not enough as companies must disclose information on negative indicators (example: emissions, waste, etc) as well in order to be transparent with their stakeholders.
c. Measuring and monitoring - Finally, companies are not aware of the most efficient methods of collecting data. Data is required to be collected from various locations of the office as well as manufacturing units. This data may not be easy to collate as such data is not conventionally collected and may not be necessarily accurate. Companies should check the accuracy and reliability of the data in order to portray the correct picture.
Are companies that focus on Tobacco, Alcohol, etc going downhill in the ESG parameter?
An ESG analysis attempts to capture the complexity of social and environmental systems. It is more important to evaluate stocks based on the company’s good behaviour rather than looking purely at the controversial end products. Au contraire, the leading companies in the business operations of tobacco and petroleum considered a part of the sin sector are like shining stars across the dirty sector. The leading companies in the tobacco manufacturing industry have embedded sustainability at the core of their strategy. They are driving towards a low carbon strategy, initiatives for management of elements such as water, energy and waste, and are taking necessary steps for mitigating ESG risks and following ESG risk management framework. Manufacturers of alcoholic beverages are lowering their carbon footprint by putting money into green and sustainable solutions. All alcohol bottles in India have been mandated to carry health warnings since 1st of April 2019. These statutory warnings on the labels include requests to consumers to not consume alcohol and drive and outline how alcohol consumption is harmful for health. Petroleum companies have also jumped on the bandwagon and imbibed sustainability at the heart of its operations. They try to complement traditional fuels with clean electricity and hydrogen, and build an optimal mix of reliable, clean and affordable energy and storage using solar, wind and batteries in order to incorporate sustainability in their operations.
How can companies get better at ESG reporting?
Identifying critical risk areas and material ESG issues that arise out of their business operations is a necessity for the companies. The companies can improve on their operations and take action against the ill effects of the operations by reporting and being transparent about their ESG performance. There are many recognized sustainability reporting frameworks, such as United Nations Global Compact (UNGC) which focus on sustainable development goals by corporates, Climate Disclosures Project (CDP) which talks about climate-related disclosures etc. In India, listed corporates are required to provide disclosures in line with Business Responsibility and Sustainability Report (BRSR) to all its stakeholders.
Indian companies can improve their ESG reporting by following the BRSR guidelines. The BRSR provides a base for comparability across companies, sectors, and time periods by emphasizing on quantifiable metrics. Areas addressed by BRSR are sustainable products & supply chain, material efficiency, ethical business practices, emissions management, data privacy & security, governance issues, environmental management, and employee quality & development.
However, many companies are not aware of the process of how incorporating it and the other global frameworks. ESGRisk.ai provides insights into the BRSR and global frameworks by providing companies with their Sustainability Gap Analysis and the ESG training which helps companies to understand ESG disclosure requirements, and assessment methodologies and helps in better adoption of ESG.