ESG SCORES - TOP 100 LISTED COMPANIES IN INDIA

KEY HIGHLIGHTS

? Lack of standardised, consistent and comparable disclosure.

? The regulatory gaps in respect of E & S become evident as scores of E & S factors fare poorly compared to G factor.

? Among high ESG scoring companies, divergence between Policy, E, S & G score is very narrow.

? Analysis using 315 Questions, 1,239 Parameters & 2,200+ Data Points

EVALUATION FRAMEWORKS:

? National Voluntary Guidelines, Business Responsibility Report, Legal requirements relating to Environment & Social, Companies Act, 2013, various Regulations / legal requirements of SEBI and relevant other applicable legal requirements or voluntary frameworks.

? United Nations Principles for Responsible Investing; SASB Standards, Global Reporting Initiative – GRI Standards; International Integrated Reporting Council – IR Frameworks; Sustainable Development Goals; Task Force on Climate-Related Financial Disclosures; UNGC Principles, International Organization for Standardization and relevant frameworks.

*National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011 (NVGs)

ESG SCORE DISTRIBUTION:

Overall ESG & Factor wise Score (Graph 1)

Variance between Max and Average is lowest at 9 in Governance against 32 & 21 in E & S factor respectively, very clearly establish causality between performance and regulations. Reflecting lack of effective regulations relating to E & S factors. This hypothesis gets further strengthened by highest of 99 and average of 77 in Policy disclosures which is result of regulatory push in governance and disclosures on policies through BRR. Therefore, low scores on E & S need not be attributed to poor performance alone but could be on account of lack of legal push in disclosures as well. Further many gaps could be due to the fact that for these disclosures, there is no prescribed format and very little historical data. Additionally, disclosures differ from company to company and at times not comparable even YoY within the same company.

ESG scores across industries (Graph 2)

ESG RESEARCH REPORT

? On average basis, IT industry tops the list of being the highest scoring industry with an average of 72, followed by Cement (69) and Metals (68).

? Least divergence was observed in Metals (8) and Cement (9) Industry, clearly reflecting impact of regulatory push as not following has negative impact.

? The top 3 industries have better disclosures on E & S, compared to other industries in the sample.

? Lowest average score was observed in Banks and non-banking finance companies, reflecting very limited disclosures on E factor.

? Evaluation model for banks was modified to include indirect environmental impact such as sustainable financing, responsible lending, economic risk parameters etc, considering the role Banks play in the corporate world, in addition to scoring on direct environmental parameters such as emissions, water consumption and effluents.

? In case of non-banking, these were not scored on direct environmental parameters such as emissions, water consumption and effluents. Although, they were scored on policies, general environmental parameters, energy consumption etc. However, the industry on average failed not only in disclosing general E parameters but also failed in disclosing S data which was more relevant (considering average industry social score of 53).

ESG factor wise divergence (Graph 3)

Note: Overall ESG score of companies has been sorted from high to low (Left to Right)

? Among high ESG scoring companies, divergence between Policy, E, S & G is very narrow, which indicates that a company has to excel on all three parameters E S & G to have a leadership status.

? However, when we move towards right, and till extreme right, the divergence gap widens, which indicates that inconsistent performance pulls you down.

? Overall ESG score line (black) in Graph 3, indicates that it is PD & G factor which are pulling scores up, whereas E&S are pulling score down barring few outliers. Clearly establishing voluntary disclosures requirement are not as effective as regulatory dictate.

On policy disclosures 60 companies scored 80+, whereas on governance factor 15 companies scored 80+, with only 1 company having overall ESG score at 80+. Similarly, 64 companies have scored less than 60 on Social factor, compared to 71 companies scoring less than 60 on Environment factor. Majority of the companies have scored 70+ in governance. This is on expected lines; higher governance score is result of almost two decades of regulatory efforts, whereas, E&S are voluntary and missing the mandatory push. Apart from lack of regulatory push, proper appreciation of E & S factor is not yet become DNA of corporates, as much as one would like it to be. SES expects that in future scores are likely to move up due to introduction of Business Responsibility and Sustainability Reporting (‘BRSR’) by Regulator – SEBI, as also due to better performance.

SAMPLE SIZE The Sample included top 100 companies (based on market capitalisation). The sample excluded Public Sector Undertaking or Government Banks irrespective of their market cap rankings.

Criteria for inclusion in sample:

? In Top 100 companies as per Market Capitalisation of NSE (as on 31st March, 2020)

X Should not be a Public Sector Undertaking or PSU Bank (Government companies / banks)

Source: sesgovernance

DISCLAIMER: The information as shared in true to my knowledge and should be considered personal views based on study performed from various sources