India Inc gradually improving in terms of ESG disclosures: Crisil report

Mumbai, May 19 India Inc is improving environmental, social, and governance (ESG) disclosure with a majority of companies showing improvement in ESG scores, according to Crisil.

Crisil’s ESG risk assessment of 586 Indian companies across 53 sectors, based on fiscal 2021 data, showed an improvement in the ESG scores of a majority of companies compared to the previous year, driven by better disclosures and improved performance on various parameters.

The improvement was visible especially in renewable energy consumption, gender diversity and Board independence. 

Upon comparing the same set of 225 companies analysed last year, 14 showed a significant positive deviation (more than five-point increase in score) and three a notable negative deviation (more than five-point decline in score). As many as 199 companies were relatively stable.

Overall, as per the latest assessment, 14 companies were in the ‘leadership’ category, 108 in the ‘strong’ category, and as many as 73 in the ‘below average’ and ‘weak’ categories.

Amish Mehta, Managing Director and CEO, CRISIL Ltd, said, “Leaders on ESG have demonstrated a clear commitment towards sustainability, and have consistently delivered superior performance. In contrast, those in the ‘weak’ and ‘below-average’ categories have poor disclosures and inadequate ESG risk-management practices.”

“The uptake of sustainability in decision making is very piecemeal in India Inc because of a lack of stewardship, and fiduciary persuasion to improve the ESG quotient. For ESG to truly be embedded and practiced in spirit, all stakeholders have to work collaboratively and create a favourable environment for ESG. In addition to focussing in the near-term on targeted actions such as decarbonisation, a mindset shift is necessary to transform from merely complying to creating value and structurally mitigating risk,” added Mehta.

Weak performance on environmental parameter

In general, the performance of companies on the environmental parameter (‘E’) was weaker compared to social (‘S’) and governance (‘G’). 

The average ‘E’ score across its coverage was 45, compared with 50 for ‘S’ and ‘66’ for ‘G’. 

“Globally, the discourse on environment has revolved around emissions, and rightly so,” it said. 

One of the key climate risks that the world is battling with is the rise in average temperatures, or global warming, a significant proportion of which can be attributed to greenhouse gas (GHG) emissions. 

It is a critical parameter to evaluate the environmental risk profile of a company. In India, only one in five companies reported their Scope 11 and Scope 2 GHG emissions. The disclosure on Scope 3 emissions was even worse. 63 out of 586 companies published this data.

PSUs vs private companies

On social aspects, public sector undertakings (PSUs) performed relatively better with an average score of 55 compared with 49 for private companies. They fared better on key parameters such as gender diversity (15.3 per cent for PSUs versus 12.7 per cent for private companies), attrition (2 per cent for PSUs and 22 per cent for private), and pay disparity (CEO to median employee pay ratio of 4.8x for PSUs versus 137x for private).

In governance practices, however, private companies outperformed PSUs, especially in Board composition and functioning. 

Despite increasing by almost 2x in the past one year, the share of independent directors in PSUs stood at 40 per cent, lower compared with 51 per cent for private companies. Similarly, while 41 companies had lead independent directors, none was a PSU. 

Further, women directors constituted 19 per cent of private company Boards, while for PSUs it was 13 per cent. 

Suresh Krishnamurthy, Senior Director, CRISIL Research said, “Governance remains the cornerstone of not just ESG, but overall corporate performance. This is amply clear from the fact that the absolute operating profit of the top 10 companies on the ‘G’ parameter saw a 23 per cent compound annual growth rate (CAGR) between fiscals 2019 and 2021, whereas that of the bottom 10 logged a negative 7 per cent CAGR.”

“The top 10 ‘G’ scorers also outperformed their respective industry operating profit growth by a solid 900 basis points (bps). As many as 6 out of 10 companies outdid their respective industries. Conversely, the bottom 10 ‘G’ scorers underperformed by a negative 1,200 bps, with 7 out of 10 companies underperforming their respective industries.”

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