What’s Stopping ESG From Becoming India Inc’s Alpha Mantra?

Late last year, the ReNew Power top management was pleasantly surprised when it saw the order book for the company’s $325-million green bond issue. It was six times over-subscribed, giving the renewable energy company the elbowroom to cut interest rate by 50 bps. This trend repeated when ReNew issued bonds in January 2020 and again in April.

ReNew Power represents a clutch of Indian companies that have raised close to $5 billion through Environment, Social and Governance (ESG) bonds. While India Inc has been warming up to ESG bonds and investing, markets regulator Securities and Exchange Board of India (Sebi) has notified disclosure norms for sustainability reporting for the top 1,000 listed companies by market capitalisation. The awareness around ESG framework among Indian companies has accelerated in the last two years, with their global investors and partners demanding stricter adherence to sustainability practices.

“There is a heightened awareness about ESG. Investors, shareholders and regulators – all are seeking transparency in ESG reporting,” says Seshagiri Rao, joint MD and group CFO of JSW Group. “A huge amount of brand value is incurred from a strong ESG. Tomorrow, if you want to export, ESG will be your gamechanger.”

Agrees Vaishali Nigam Sinha, chief sustainability officer at ReNew Power and Chair, ReNew Foundation. “ESG has become a driver not only for capital inflow but also bottomline.”

ESG and greenwashing were terms perceived close to each other till recently. For many, it was another marketing and communication tactic without much resonance with boardroom strategy or financial impact on a company. But, now there are enough studies to show that a strong framework of environment-conscious and socially responsible business practices along with strong governance ensures business risk mitigation.

But the gamechanger is the meteoric rise in global sustainable investment totalling $35.3 trillion in 2020, accounting for more than a third of all assets under management in five major markets of the world – the US, Canada, Australasia, Japan and Europe. It showcases the increasing ESG orientation of investors. While this has pushed ESG into boardroom discussions in India, the biggest traction came with the onset of the pandemic. “We now have reasonable evidence from global markets on how companies having better ESG and sustainability performance have outperformed the indices. Companies with more robust ESG strategy did better even during the Covid uncertainties by protecting people, communities as well as economic performance,” says Mahendra Singhi, MD and CEO, Dalmia Cement.

Planet, People & Profit

The pandemic taught us how non-financial events could upend businesses, underlying the importance of climate, human resources and governance in risk-management. In the process, ESG has emerged as the alpha mantra for India Inc, in its quest for resilience. (See table: India Inc warms up to ESG)

“A strong ESG framework helps reduce cost, gives new sources of revenue, access to new talent, and brings you new consumers. It is another quiver for companies to become more resilient,” says Anirban Ghosh, chief sustainability officer at M&M.

While the advantages of ESG adoption are widely accepted in India, several barriers for internalising responsible business remain. Sebi’s directives under Business Responsibility and Sustainability Reporting (BRSR) calls for voluntary disclosures FY21 onwards, but experts warn against it becoming another box-ticking activity by companies. “The mindset about running a business is around maximising profits, while ESG is about long-term benefits and not the here and now. So, for effective adoption of ESG, beyond green-washing, it has to be part of a company’s vision,” says Sinha.

Sustainability practitioners in India say a key barrier is the inability of large sections of India Inc to assess the ‘value’ of being responsible. This, despite tonnes of global precedents and research to discover this ‘value’. A McKinsey report on ESG and value creation illustrates how strong ESG proposition over a period improves topline growth and cost reduction through efficient resource management. It reduces regulatory and legal interventions through focus on governance. It also reaps the benefits of higher employee productivity through social and community engagements.

ESG ensures lower risk by allocating capital towards more sustainable means of production. All of these add up to higher investor interest, better credit ratings and bigger brand value.

“Business maturity of Indian corporations does not always enable assessing the true value of ESG for future-proofing business,” says Dipankar Ghosh, partner and leader, sustainability, climate change and ESG, Thinkthrough Consulting. “India Inc needs to invest in building considerably enhanced intellectual capital that would eliminate the barrier for leveraging ESG towards profitable business continuity.”

The other barrier is cost. A large part of responsible business, where resource efficiency is optimised and wastage reduced, involves adopting the latest technology which comes at a cost. “India is not a position to absorb the cost of transition to effective ESG. So, it has to be enabled through government intervention in the form of subsidies, incentives and grants,” Rao says.

Measuring Sustainability

As the regulator walks towards bringing sustainability reporting at par with financial reporting, the wide array of standards to measure ESG, could be puzzling. “It can be confusing for CEOs to choose from the large number of standards available” says Dipankar Ghosh. “And this confusion can lead companies to postpone their ESG proposition.” From GRI to Integrated Reporting to the framework developed by the World Economic Forum in association with the Big 4 accounting firms, several options are available for measuring sustainability.

“Globally, it would be prudent to adopt a reporting standard by combining the many frameworks available for measuring and disclosing ESG,” Dipankar Ghosh says.

While a universal standard is developed, here’s hoping the regulator’s directives are followed by India Inc in letter and spirit, where all aspects of responsible business: environment, social and governance are equally prioritised.