Is ESG going to disrupt the Corporate Misgovernance? (Part-2)

In my last edition, I highlighted the nine golden principles that the Ministry of Corporate Affairs had devised in July 2011 to encapsulate the ESG requirements with a special focus on disclosures related to corporate misconduct.

Today’s edition is going to highlight steps of how businesses should embrace responsible practices, how ESG reporting works for organizations in building a sustainable brand for the future, what is Stakeholder Capitalism, and how ESG reporting and Data Analytics can be a key differentiator for futuristic growth.

With the unveiling of the budget yesterday, our government has laid down steps to make India, the next torchbearer of the world.

Building India’s priority list towards 9 pathbreaking reforms i.e.

1. Productivity and Resilience in Agriculture
2. Employment and Skilling
3. Inclusive Human Resource Development and Social Justice
4. Manufacturing and Services
5. Urban Development
6. Energy Security
7. Infrastructure
8. Innovation, Research and Development
9. Next Generation Reforms?

the government is positioned towards Viksit Bharat.

Also, the removal of Angel Tax by all classes of Investors and increasing the limit of Mudra loans from 10 lacs to 20 lacs is a welcome move for the Start-up ecosystem to thrive with a deeper impact. This boosts investor sentiments to come ahead without hesitation encouraging young entrepreneurs to dream big through their innovative ideas while investors back their investible ideas.

How Businesses Can Embrace Responsible Practices

While entrepreneurs are encouraged to grow, the government has indicated businesses following responsible practices to embrace the National Guidelines for Responsible Business Conduct (NGRBC)??

In the world of business, talking the talk is one thing, but walking the walk is where it counts. Embracing responsible business practices isn't just a one-off task; it's a journey that involves every part of a company. From the top brass to the newest recruit, everyone has a role in weaving this set of guidelines and principles into the fabric of their daily work.

Let's break down the key steps businesses need to take to make this happen:

Commitment at the Top Level

The journey begins with a commitment from the company's leadership. Top executives and the board of directors should actively endorse these principles. This commitment should be communicated throughout the organization.

Policy Development

Develop policies that reflect these principles. This includes creating guidelines for ethical behavior, sustainability, human rights, and stakeholder engagement. These policies should be integrated into all aspects of the business, from operations to decision-making.

Training and Awareness

Employees at all levels should be trained and made aware of these principles. Regular workshops and educational programs can help embed these values into the company culture.

Integration into Business Processes

Integrate these principles into everyday business processes. This could mean adjusting supply chain management, product development, and customer service protocols to align with these guidelines.

Stakeholder Engagement

Actively engage with stakeholders, including employees, customers, suppliers, and the community. This involves listening to their concerns, expectations, and feedback and incorporating them into business practices.

Monitoring and Evaluation

Establish metrics and Key Performance Indicators (KPIs) to measure adherence to these principles. Regular monitoring and evaluation can help identify areas for improvement.

Reporting and Transparency

Be transparent in reporting the company's performance about these principles. This could be through sustainability reports, ESG (Environmental, Social, and Governance) reports, or regular updates to stakeholders.

Continuous Improvement

Treat the adoption of these principles as a continuous journey. Regularly review practices and policies and be open to making changes for further improvement.

Align with Legal and Ethical Standards

Ensure that all business practices comply with local, national, and international laws and ethical standards. This includes adhering to regulations related to labor laws, environmental protection, and corporate governance.

Community Involvement and Social Responsibility

Get involved in community initiatives and take active steps towards corporate social responsibility. This can help build a positive brand image and strengthen relationships with the community.

By taking these steps, businesses can successfully incorporate these guiding principles into their operations, fostering a culture of responsibility, sustainability, and ethical practices. (Views as expressed by reportyak.com/blog/ngrbc)

ESG Reporting and its Importance

Environmental, Social, and Governance (ESG) reporting is a method used by companies to disclose their governance structures, societal impacts, and environmental footprint.

ESG reporting is a form of non-financial reporting where organizations communicate their environmental performance (E), social responsibility (S), and governance structures' strength (G) to their stakeholders. These three dimensions provide an in-depth understanding of a company’s sustainability and ethical impacts.

For example, a company might report -

• It’s carbon emissions of it’s supply chain
• Initiatives for community development
• Diversity of its board members

There is a Fashion retailer called E-kart that aims to believe in sustainable practices like circular economy and renewable energy, also aiming to build trust among its stakeholders ie. shareholders, customers, and employees.

Report by E-kart?

The reason ESG is gaining momentum and we see the involvement of large corporates in this phenomenon -??

• Investor demand: Investors are becoming more aware of the risks associated with climate change and other ESG issues. They are also increasingly choosing to invest in companies that align with their values and goals.
• Performance: Companies that perform well on ESG metrics tend to outperform their peers financially. They may also be better positioned for the long term and better prepared for uncertainty.
• Policy support: Governments around the world are increasingly supporting ESG investing through policies such as tax breaks and mandatory disclosure requirements.
• Public pressure: People issues, such as how companies treat their staff and suppliers, have come to the fore. Companies that have treated their people well during the COVID-19 pandemic may have improved their corporate reputations and gained more business.
• Environmental degradation: Increased environmental degradation has been a wake-up call for many investors, prompting them to adopt a more sustainable investing approach.

According to an EY report, COVID-19 has been the key driver of pushing and reinforcing the importance of ESG issues which have been around for more than 2 decades now. Investors feel that companies that are high on their ESG scores and can report it transparently are better positioned to handle risks and prepared to manage uncertainties.

Companies that realign to the *Stakeholder Capitalism agenda may have a competitive advantage over those that try to return to business as usual.

There had been fears that with the emergency response to the COVID-19 pandemic, and with many companies facing an existential crisis, the focus would move away from ESG issues. But, in many respects, the opposite has occurred. It seems the COVID-19 pandemic has accelerated the transition to a more purposeful and inclusive capitalism. Although many organizations are in survival mode, ESG issues are likely to remain critical and essential to resilience and long-term recovery.

Pressure is mounting from various segments of people and authorities, be it Government, Society, and Investors.

The Government has been instigating businesses to undertake green initiatives as an outcome of response to COVID-19 measures with a specific focus on accelerating the transition to a zero-carbon economy.

Society (S) in general is seeking good treatment towards employees, staff, and suppliers during a crisis-like situation. Those companies who have treated their internal stakeholders well during the COVID-19 pandemic have likely had improved corporate reputation and gained more business.

The Investors on the other hand are focusing their attention on ESG issues and stakeholder capitalism.

The growing significance of ESG issues to investors can be seen in the EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey (2020).?The survey found that, of the 98% of investors surveyed who assess ESG, 72% carry out a structured review of ESG performance, compared with just 32% in the previous survey conducted two years earlier. Moreover, many of those who currently use an informal approach, plan to move to a more rigorous regime (39%).

Institutional investors are aligning their portfolios toward better ESG performance. This signals a different approach from focusing on “responsible funds,” and instead seeing ESG issues as fundamental to the performance of all investments.

The transition to a decarbonized future is likely critical to the long-term resilience of companies, the economy, and the planet as a whole. Strong ESG strategies and frameworks should be vital to economic recovery and for companies to thrive in the long term.

Energy sector opportunities

Different pressures are now converging to create the market conditions for rapid transformation within sectors. Energy is a prime example. Alongside regulatory support for renewables, and an ever-decreasing cost base for solar, wind, and battery-storage solutions, stakeholder forces are focusing on decarbonization and the realignment of assets toward lower-carbon alternatives. By 2040, according to the International Energy Agency, over half of all electricity supply will be from low-carbon sources. With an increasing demand for the electrification of transport and industrial processes and greater funding through green bonds and green loans, opportunities for this sector to capitalize on decarbonization should be plentiful. Companies that focus on ESG issues and realign themselves to the Stakeholder Capitalism agenda may have a competitive advantage over those that try to return to business as usual.

*Stakeholder capitalism is a philosophy based on the belief that companies have an obligation that goes beyond simply providing returns for shareholders. It suggests that companies should be mindful of, and responsive to, their impact on society and the environment. This can involve: creating secure jobs for employees, embracing sustainable practices, serving customers loyally, cultivating long-term supplier relationships, paying fair taxes, or working to minimize the environmental footprint of operations.

ESG Reporting and Data Analytics - A Key Differentiator for Future Generations

ESG (Environmental, Social, and Governance) factors have become increasingly important in recent times for the corporate world, driven by the need for sustainable practices and responsible business conduct. Integrating data analytics into ESG reporting can significantly enhance transparency, accuracy, and efficiency, paving the way for easier reporting and accountability for future generations.

Here's how data analytics can facilitate ESG reporting:

1. Data Collection and Integration: Data analytics tools can aggregate and integrate vast amounts of ESG-related data from multiple sources—financial reports, operational data, supply chain information, etc. This ensures comprehensive coverage and reliability in reporting.

2. Accuracy and Consistency: Automated data analytics processes reduce human error and ensure consistency in ESG reporting metrics over time. This reliability is crucial for stakeholders and investors relying on accurate information for decision-making.

3. Identifying Trends and Patterns: Advanced analytics techniques such as machine learning can uncover trends and patterns in ESG data that may not be immediately apparent. This helps in the proactive management of risks and opportunities related to sustainability.

4. Real-time Monitoring and Reporting: With real-time analytics, organizations can monitor ESG performance continuously and provide timely updates in their reports. This agility is essential in responding to evolving regulatory requirements and stakeholder expectations.

5. Predictive Insights: Predictive analytics can forecast future ESG performance based on current trends and external factors. This foresight enables organizations to anticipate challenges and strategize for long-term sustainability.

6. Enhanced Stakeholder Engagement: Clear and insightful ESG reporting, supported by robust data analytics, improves communication with stakeholders. It fosters trust, demonstrates commitment to sustainability goals, and attracts socially responsible investors.

7. Compliance and Regulatory Requirements: Analytics can ensure adherence to regulatory guidelines by automating compliance checks and generating audit trails for ESG reporting processes.

8. Benchmarking and Comparison: Data analytics allows organizations to benchmark their ESG performance against industry peers or global standards, providing context and driving continuous improvement.

By leveraging data analytics, organizations not only streamline their ESG reporting processes but also elevate their sustainability initiatives. This transparency and accountability are essential for meeting the expectations of future generations who prioritize ethical business practices and environmental stewardship.

Conclusion:

Beyond ESG, Towards Sustainable Development Goals (SDGs)

The Sustainable Development Goals (SDGs) are a set of 17 objectives established by the United Nations to address global challenges.

Integrating these goals into our operational frameworks is a moral imperative and a great opportunity to boost innovation and efficiency. With data analytics, we can support the design and implementation of initiatives that support these 17 goals and will boost your ESG score.