Building Blocks for ESG

Environmental, Social and Governance (ESG) is an irreversible trend. Integrating ESG factors with traditional financial data provides a more comprehensive and holistic perspective of an organisation’s overall performance.

ESG metrics helps stakeholders understand how a company navigates risks and opportunities pertaining to environmental stewardship, social responsibility and governance practices. Qualitatively, ESG is a narrative of what a company does on a day-to-day basis. This narrative reflects an organisation’s commitment to integrity, transparency and accountability.

Unlike financial metrics that display a clear-cut trajectory of being positive or negative, when ESG metrics get quantified, the results may be harder to interpret due to a myriad of other factors. ESG factors may also have strong dependencies on the macro-economic and geo-political landscape, pace of implementation of reforms and the stage of maturity of ESG-related regulatory frameworks.

ESG frameworks are still evolving. While many crave standardisation, the reality is a one-size-fits-all approach for ESG does not exist. In equal measure, using standalone ESG ratings without taking cognisance of the financial performance of a company may result in a skewed assessment of the performance of a company.

So what are some of the immediate ESG priorities for companies?

First, recognise that the three lines of defence -- be it operational management, risk management and compliance and audit are increasingly becoming relevant for ESG disclosures as well.

Second, pertains to assimilation and automation of ESG data. Streamlining efforts of ESG data collection is imperative to reduce time-consuming, manual interventions with potential for human error. Automation allows for real-time monitoring of data beyond the financial metrics. Further, integration is critical as ESG data relies on both, internal and external databases, particularly for environmental parameters and value chain partners.

Third, is the need for increased co-operation and co-ordination at a systemic level. For example, incorporating ESG criteria into the value chain entails engaging with a myriad of partners to ensure sustainability standards and practices are adhered to. Especially for larger companies with multiple vendor partners, this can be an extremely onerous task.

The solution lies in creating a common repository for value chain partners that will enable an entity to access relevant information such as sourcing details, production processes, compliance with labour and environmental laws amongst other factors. The value chain repository needs to function on similar lines of a credit bureau. Creating a common repository will bring in efficiencies for companies needing to adhere to new regulations on value chain reporting. Further, such a repository would provide a platform to encourage smaller players to disclose their ESG data.

Such databases will no doubt take time to create. Yet, if one draws a parallel, about 24 years ago, there were no credit bureaus in India, while today virtually no loan gets approved without a bureau check. This is the trajectory needed for value chain reporting. The question remains who will seize this opportunity and have the first mover advantage?

(Views are personal)

Anjalee S. Tarapore

Executive Vice President & Head – ESG

HDFC Bank