What is ESG and Why is it Important?

ESG is a topic that has become a global priority, as suggested by its growing prevalence in G20 discussions and the establishment of the G20 sustainable finance group. Consequently, it is also becoming a strategic priority for global businesses, leading them to invest in sustainable initiatives. An indicator of this trend is the reported increase in hiring for ESG-related jobs, with companies like Infosys, Marico, Danfoss, Bisleri and more taking active measures towards responsible growth. However, the adoption of ESG initiatives has largely been focused on the environmental aspect or “E” of ESG. Whereas, in reality, ESG is a broader umbrella term that encompasses different values and practices.

What is ESG and why does it matter?

ESG, short for Environmental, Social and Governance, is a framework that organisations use to recognise, measure, and report the non-economic impact they have on different stakeholders, including their employees, partners, and the environment. It helps regulators and investors to understand how a company operates and if it aligns with the generally-accepted values of corporate responsibility. The different practices forming the ESG framework grouped under the three pillars: Environmental, Social, and Governance:

Environmental

The environmental aspect entails a company's impact on the natural world and its management of resources. It includes various aspects such as the company's carbon footprint, its ability to mitigate climate change, its use of renewable energy, and its management of waste and pollution.

Social

This aspect of ESG evaluates a company's impact on society and how it treats its stakeholders, such as employees, clients and its surrounding environment. Social considerations include a wide range of topics, such as worker rights, human rights, consumer privacy and community engagement.

Governance

A company's leadership, ethics, and overall business practices are evaluated under the “Governance” pillar of ESG. These considerations include transparency, executive pay, board effectiveness and anti-corruption measures, among others.

Companies that prioritise these issues are likely to have better overall business practices and prove to be more sustainable in the long term. It is becoming important for companies to focus on the same as more and more investors are preferring ESG-compliant businesses for investment. Furthermore, regulators are increasingly penalising companies engaged in unsustainable practices.

ESG as a key element for company growth

Adhering to ESG benchmarks can make companies better equipped to manage the impacts of climate change, which is a growing concern globally. They may also be more likely to be responsive to the needs of local communities and to promote sustainable development, which can improve relations with stakeholders and lead to an improved brand perception. Having sustainable development goals can also have a significant impact on a company’s Social License to Operate (SLO). Having SLO can help a business build trust and positive relationships with the local community and other stakeholders, which can lead to increased support for the company's operations and activities. This can also help to reduce the risk of social and environmental conflicts, which can be difficult and time-consuming to resolve.

ESG regulations and benchmarks in India

To elevate the ESG standards in India, companies are required to adhere to certain ESG benchmarks. The Security and Exchange Board of India (SEBI) has introduced the requirement for ESG-related disclosures and has also constituted an ESG advisory committee. According to SEBI, the top 1000 listed companies in India are expected to report on Business Responsibility and Sustainability factors. Their mandatory reporting on this front will be a part of annual reports starting from fiscal 2022-23. This can be attributed to investors demanding products that are more sensitive towards the people, planet and corporate governance. Moreover, many other regulations are imposed upon companies to review their ESG strategies, which include the regulations introduced by the National Stock Exchange of India (NSE). NSE launched the NSE-Sustainability Index in 2020, which tracks the performance of companies that rank well on ESG factors. This assessment provides a broader picture of India’s sustainable development goals and acts as a catalyst in inspiring companies to have an ESG strategy and practices.

ESG has become a top priority for businesses in India and globally. Being ESG-aware can help companies to align their operations with global sustainable development goals and contribute to the well-being of society and the planet.