ESG in the boardroom: a harbinger of much-needed change

The COVID-19 pandemic, despite the horrible and long-term social and economic disasters it brought in its wake, also facilitated a significant shift in the perception of policymakers from diverse sectors. In more ways than one, the calamity prompted those in power to count their blessings and appreciate the necessity to focus and manage resources wisely for a sustainable world.?

While almost all the issues considered under the umbrella of ESG have been dealt with earlier with no concrete solutions, the pandemic served to put all these issues under a renewed focus. It provided relevant sustainability issues with the much-needed persistence that was lacking earlier. Rather than sweeping issues related to ESG under the mat — as had happened many times before, even in the boardrooms of blue-chip firms — directors and policymakers are now more enthusiastic than ever before to at least show that they are aware and considerate of ESG issues.

?What powered the focus on ESG in recent times??

?In July 2021, the European Commission issued a Sustainable Finance Strategy that focused on investing more in sustainable projects. While Europe set the pace for imbuing investments with an unwavering focus on environmental Sustainability, the idea caught up in the US with much more enthusiasm, encouraged by movements and issues such as Black Lives Matter, the shale gas controversy, pay-parity based on gender and so on. These mass movements helped to amalgamate diverse social and environmental concerns that finally evolved into a holistic initiative having problems for the environment and its sentient beings.?

Why ESG matters in the boardroom

?Recent research 1 has shown that ESG has become a critical point of discussion in board rooms of companies in Europe and the US. While the trend has been slow to catch up in most parts of emerging economies, ESG sentinels are soon expected to keep a hawkish eye on how business policies evolve globally. Environmental issues have been receiving attention for some time now; today, social and governance concerns are discussed in boardrooms probably because of the understanding that all components in ESG are not mutually exclusive.

?There is enough reason to believe that the focus on ESG was expedited partly because of the urgency involved in managing various risks. While the pandemic came with a set of risks, resultant changes in business operations gave rise to more risks. Policymakers soon learnt that even enabling technologies like the Internet came with hazards that could sink firms into irrecoverable losses. Since risk management forms a significant core responsibility of leadership, action to prevent or attenuate risks became the rallying point around which policies were devised. Rather than focus on a single kind of risk, ESG provides space to view risks holistically so that expected and often unexpected troubles can be dealt with in advance.

?ESG's ability to achieve common goals elevates board decisions to become impactful precursors of social change. For example, gender diversity and support for minorities, a key concern of many firms, has helped steer social equality by empowering many. ESG can transform businesses and corporate entities that essentially seek to enhance profits to contribute to positive social change.?

Therefore, decisions that are taken within boardrooms have the potential to make changes in the lives of people who may not be directly related to the corporate entity making the decision. This possibility for inclusive growth empowers boardrooms as drivers of positive change globally.

Brand Reputation and ESG?

?The capability of ESG as a framework that can enhance corporate governance was perhaps reinforced in the past few years when many companies had to deal with significant hits to their brand reputations. Big names in the automobile, banking, oil and even food industries, among others, had to deal with reputational impacts that eroded their credibility built over many years. Several commissions and studies that went into the issue hinted that a specific focus on ESG values could reverse this appalling lack of ethics in corporate management, consequently raising the risk level within organisations. Investors, especially activist investors, quickly called for ESG principles to enhance ethics and Sustainability within organisations. This resulted in sustainability reporting, becoming a rallying point for investors to either agree or disagree with the choices of corporate managers.

Since ESG may be used to measure performance, ethics and management abilities, investors, big or small, prefer to focus on Sustainability reporting metrics to assess where the company is moving to social responsibilities. There is still an open topic around the way ESG is measured or tools, including the data sources used. A standard agency system must benchmark the data sources to have consistent reporting. Sustainability reporting and ESG scores will form a critical aspect of reputation-building by firms in the coming days. The early signs are already very evident: today, company boards deal with gender parity, environmental viability of projects and governance topics in their schedule. The newly evolving Chief Sustainability Officer roles will help in a big way to drive the ESG goals of the company.

?If the movement sticks on the course, businesses will soon move from single-focussed profit-making to a new system that merges profits with social responsibilities.

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Regulatory changes for Sustainability reporting around the Globe.

Globally more and more markets are moving toward responsible business and ESG reporting.?

The EU- The Parliament reviews corporate sustainability reporting directives (CSRD) in 2022. the proposal extends the scope of reporting requirements and categories of companies subject to them. The CSRD reporting would apply to all companies that meet two out of the three criteria 1) Balance sheet of €20 m 2) Employs 250 employees or more during the financial year, 3) Turnover of €40 m.

Germany has already adopted a law to conduct audits of companies with more than 3000 employees conduct audits of their suppliers (direct and indirect) regarding environmental and human rights violations from Jan 2023. From Jan 2024, the reporting will be expanded to cover companies with 1000 or more employees.

India - The new SEBI ( Stock Exchange Board of India) guidelines on Sustainability reporting clearly show Sustainability and ESG are no longer about compliance alone. The shift from (BRR) business responsibility reporting to (BRSR ) business responsibility and sustainability reporting clearly shows the need to integrate business strategy with sustainability goals.

The new BRSR guidelines of SEBI and the release of the ESG Index by NSE are the proper steps toward a sustainable India and emphasise the responsibility of Company boards on this topic.

The road forward

The biggest challenge and opportunity with ESG is that it is consistently expanding to include more issues under its fold because of its inclusive nature. What started as a concern for the environment has soon cascaded into a movement with equal regard for human values, good governance and risk reduction. The road ahead promises to be exciting, ensuring that managements have to constantly evolve to deal with ESG issues rather than playing a repetitive, well-defined role that only focuses on enhancing profits. Company directors would have to outperform concerning ESG awareness and implementation and show investors valid proof that they are worthy of receiving investments. At the same time, they would also have to devise means to remain competitive without sacrificing values. This would require apparent oversight, proactive planning and strategy and a clear understanding of what may be expected in the ESG space. These shifts need Company boards and directors to be more proactive in measuring Sustainability as part of their company strategy.

The views expressed are personal

Reference and credits

1?https://www.iflr.com/article/b1xdn7d514l2t9/esg-is-the-boardroom-giant-that-keeps-on-growing-legislative-considerations

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