The power of ESG
Dear Readers,
This week India took a big step in ESG compliance. The market regulator Securities and Exchange Board of India came out with the Business Responsibility and Sustainability Report (BRSR), a set of rules for the top 150 listed firms for reporting sustainability measures undertaken by them. Sebi aims to extend these to 1,000 listed firms in the next two years.
With rising environmental concerns, the actions over ESG and sustainability have increased manifold globally. From general events to board meetings to the G20 summit, the idea of ESG and sustainability has been widely discussed on various fora. Companies and regulators have framed rules for ESG or sustainability as a whole.
The Reserve Bank of India has started issuing Sovereign Green Bonds, while many mutual funds have launched ESG funds. But the wide adoption of ESG is going to take some time. The RBI plans to increase issuances of SGBs by 50 per cent in the next fiscal to Rs 24,000 crore from Rs 16,000 crore in FY23.
ESG adoption is making an elephant dance
I am sure, no one will dislike ESG as an idea but building a structure around it is going to be as difficult as making an elephant dance. Let me explain why. By and large, Indian companies are known to grumble over compliance, and ESG compliance will be an additional file that they will have to attach to their filings. Creating a whole format for ESG compliance is also a challenge. There will be ESG rating agencies, but setting up parameters and putting everything in chronology for compliance is not an easy task. We need to bifurcate the issues that create a nuisance and add segments that showcase their green sides. The real challenge here will be to place a robust system that collects the data points that actually matter.
The three pillars
ESG consists of three pillars - environment, social, and governance. Each pillar may have a drop-down menu with different topics. For example, the environment can go beyond green energy and climate change and also include brown areas.
In a conversation with me, six months back, Dr Darian McBain said something very notable. “There are some good processes we speak about the importance of data, which is true and interoperability disclosures. But I can say that there's also a chance that we could do all of this work and not really have the right impact,” McBain was the Chief Sustainability officer at the Monetary Authority of Singapore when I interviewed her.
On the social side, it's not just about the social impact but also about human capital as a whole that companies use internally and externally. Governance is not just about regulatory requirements but more about ethics and building cultures.
While there is ESG momentum maintaining standardisation, building accuracy and consistency will be a task. And more importantly, how will it be scored? Finance leaders are debating over these issues.
We speak about large companies but certain things should apply to small and mid-sized companies as well.
ESG benefits for businesses
If we can keep the pain points away, there are enormous benefits of ESG. The Economic Survey 2023 says, “Early research shows that ESG performance reduced stock return volatility during Covid-19 and enabled firms to access capital at lower cost by building investors’ confidence as ESG disclosures create long-term value for investors as well as reduce information asymmetry.”
Sustainability and ESG are now integral parts of any fund manager’s investment criteria. In fact, globally, fund managers are looking at ESG as a central theme while allocating capital. If companies have to raise funds, ESG compliance with a greater score will help them access funds seamlessly, with perhaps low rates. The large capital tanks, such as pension funds, sovereign wealth funds and family offices are not just looking for returns but also at the social impact of their investments.
According to Harvard Law School’s ESG Global Study of 2022, Europe boasts the highest percentage of ESG users with 93 per cent, whereas North America is 79 per cent and Asia-Pacific is 22 per cent. It added that there is a bias towards active strategies when investing in ESG as nearly two-thirds (around 63 per cent) of global investors (80 per cent in equities and 58 per cent in bonds) prefer active funds that integrate ESG.
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ESG moving ahead...
The roles of asset managers, fund managers, credit analysts and risk officers have been changing since ESG came into prominence. More roles will be created in future to cater to ESG and sustainability. Large domestic lenders and global banks have already created a Chief Sustainability Officer and added ESG as one of the parameters in their due-diligence framework. Will companies that are not ESG compliant face hurdles in raising funds in the future? If the answer is no, it may not be easy, as central banks are also reviewing the exposures of lenders.
The United Nations’ Intergovernmental Panel on Climate Change released a nearly 4,000-page report in 2021 which said that the world’s temperature could rise by 1.5 degrees in the early 2030s under all emissions scenarios. But even under the net-zero scenario, global temperatures could reach as high as 1.7 degrees relative to pre-industrial times by 2040.
Hence, more than 10 countries including India have signed up to the “30 by 30” target to protect 30 per cent of the world's oceans by 2030.
There is a greater response for ESG from all the forces but I strongly feel it should not become another tick box as part of compliance and its real meaning should not be ignored. Then there will be a real difference.
This week, another big news came from the?National Payments Corporation of India as it implemented a 1.1 per cent interchange on prepaid payment instruments?while using merchant transactions over UPI. Also,?the insurance sector regulator, IRDAI, restructured insurance agent commissions.
Apart from this, we filed a couple of important stories on recent developments this week. I am adding the top five of them here for your reference. Trust, you will find them meaningful.
Happy Reading,
Amol Dethe
Editor
ETBFSI
Chief Financial Officer
1 年Chief Editor Amol Dethe Ji, Thank you for the excellent article. The story referred all the sensitive points and surely the target of '30 by 30' deserves more focus of all the stakeholders. Thk You again Please