The onset of the Covid-19 pandemic has led more investors to seek sustainable investing. How does a company treat its employees? Do the companies we choose for investments do anything for the betterment of our society and its people?
Today, in response to this demand for responsible investing, more and more companies are reporting their performances under ESG standards. In fact, in June 2021, CRISIL released ESG Scores for 225 Indian companies to gauge the compliance of companies across eighteen sectors.
What are the ESG criteria?
The ESG or Environmental, Social, and corporate Governance criteria is a business reporting method that helps a company, its stakeholders, and shareholders understand how the company manages its responsibilities to its consumers, the environment, and maintains its ethics. The term came into existence in a UN report in 2005.
Fulfilling the ESG criteria can mean different things to different companies, depending on the offerings it sells to the market. For example, fulfilling ESG standards for a manufacturing business can mean using more renewable energy in its factories.
In a world that is becoming more and more concerned with caring for the environment, ethics, and people, measuring company performances against ESG standards can be equally beneficial to companies and our society.
Benefits to Companies
Due to the rising trend of responsible investing, mutual funds have been pouring money into ESG-compliant companies. Inflows in the ESG mutual funds surged to Rs. 3,686 crores in FY-2021. These funds comprise companies that comply with ESG criteria.
Retail investors choosing ESG funds are usually long-term investors with goals that extend profit-earning. These investors choose ESG companies to represent their consciousness; this long-term outlook can provide companies with more stock liquidity.
ESG-compliant firms practice business responsibly, making them a safe avenue for retail investors. Apart from investors, suppliers and lenders consider it much better to be associated with an ESG-compliant company with a better chance of not being involved in any malpractices.
Companies that identify the ESG criteria they can apply to their business and stick with them attract a positive brand value among consumers. Also, these companies can attract and retain a talented millennial workforce, most of whom will always be concerned about the stance of their employer in ESG-related concerns.
There is a competitive and strategic edge hidden in the identification of the right way of implementing ESG. Companies that find the most befitting methods of compliance will be able to stay committed to ESG and make the switch to this reporting method faster than others.
For example, while a chemical manufacturing company can utilize better waste disposal methods for ESG compliance, the same might not work for a service-providing firm. Asian Paints launched new eco-friendly manufacturing facilities. Maruti Suzuki gave away scholarships to students from economically weaker communities.
Each company’s strategic benefit from ESG lies in its ability to find the best way to operate sustainably without making changes that become too hard to follow or implement.
Where does India stand with ESG Reporting?
In India, while ESG reporting had not been made mandatory for the Financial Year 2021-22, it was made compulsory for the top 1,000 listed companies by market capitalization for the Financial Year 2022-23. This disclosure will be mandatory as a part of the company’s Business Responsibility and Sustainability Report (BRSR). As of 2019, India had already earned $29 billion from investments in such funds.
Indian companies adhering to ESG standards have also been added to the Dow Jones Sustainability Index rankings in 2020, with Hindalco being the only Indian company to appear as an industry leader in these rankings.
Companies previously ranked in the DJSI include Havells, Godrej, etc. Majorly, these companies are Indian market leaders, offering high ROE and stable dividend payouts, among other performance indicators.
The future of ESG
While ESG is faring well in the markets today, the success of ESG reporting will depend on three things. Mainly –
- The adaptation of ESG criteria in India and across the world;
- Whether companies consider it helpful for the society or a sacrifice of returns; and
- The accuracy and quality of reporting done.
For the ESG criteria to become a household name worldwide, a standard of adherence is essential to ensure quality reporting. Until then, companies can take the first step to become the standard of ESG reporting in their sector and economy.
Considering that the ESG criteria might just become mandatory across nations, the faster companies adapt their reporting to ESG, the better it will be for them.
About the Writer
Simaran Sinha
Pursuing PGDM at IMT Hyderabad
An avid reader with an interest in business research, personal finance, and investing writes about ESG in the business world.
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