It pays to go green

Sunil K. Sinha | Updated on June 26, 2012

Such businesses can invite public and shareholder disapproval.

Sustainable business is not a mere slogan. It can make or break a brand.

The Rio Earth Summit or Rio+20 represents another milestone in an ongoing global effort to achieve sustainable development goals. The challenges emanating from population growth, high natural resource consumption, rising pollution and climate change can derail, or render India’s growth process unsustainable.

It is imperative that to make growth sustainable the development model pursued so far is reworked to address the emerging challenges. With an increasingly prominent role played by the private corporate sector, the onus will be on them to pursue business strategies that minimise ecological risk.

What does sustainable development or sustainability mean for a corporate? Corporate sustainability is about conducting business in way that benefits all stakeholders, such as employees, customers, business partners, communities and shareholders; environmental and social concerns become an important part of business, as opposed to being factored in at the end.

According to Mr A.W. Savitz and Mr K. Weber, authors of The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social and Environmental Success—and How You Can Too, sustainability for corporates is not about philanthropy, nor is it about ethics; it is about finding the sweet spots where the long-term interest of shareholders and society overlap, for example, reducing energy consumption to cut costs.

Corporate perception

Not so long ago, the job of most companies was relatively simple: provide safe goods and services to the consumers; provide a reasonable return to the shareholders; and comply with legal obligations. However, this is no longer the case.

With increasing media glare and public scrutiny, companies are becoming conscious about the fact that the world is moving away from a “trust us” culture (where companies can rely on society’s broad acceptance that they act in good faith) to “show us” culture (where companies have to constantly demonstrate their intent and conduct to change for the better).

Thus, companies are recognising that merely abiding by regulatory standards, philanthropy or self-selecting disclosures (‘green washing’) are not enough. They are realising that sustainability-related issues, if not handled properly, can lead to reputational and operational loss.

Investors are also realising that chronic or multiple problems with a company’s conduct on environmental, social and governance (ESG) issues may be indicative of broader management problems, which can have material impact on the financial performance of the company. Therefore, companies are increasingly viewing ESG-related issues as a business risk, as opposed to a mere corporate social responsibility issue.

Need to do more

This change in perception has led many Indian companies to do one or more of the following: defining ESG risks and monitoring them through enterprise-wide risk-management systems; linking those risks to a broader, balanced scorecard or other qualitative forms of performance reporting; senior executives managing those risks; or regularly engaging with stakeholders.

Further, companies are also realising that incorporating ESG issues into a company’s corporate policies is not enough, as the public demands transparency and accountability. Therefore, credible reporting about the company’s conduct on these issues is as important as financial reporting.

The need for such non-financial reporting is also spurred by peer pressure, growing activism of institutional investors and, in some cases, due to regulatory fiat.

Recently, the Securities and Exchange Board of India has made it mandatory for the top 100 listed companies by market capitalisation to submit business responsibility reports, as a part of their annual reports. These would describe measures taken by them along the key principles enunciated in the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, framed by the Ministry of Corporate Affairs.

Reporting standards

Over the past two decades, a growing number of Indian companies have begun to publish non-financial reports covering their conduct and actions on ESG issues.

However, non-financial reporting, unlike financial reporting, takes diverse formats, and often the information presented in them varies widely.

This is because non-financial reporting is still evolving and the process of measuring and reporting on non-financial parameters at a corporate level without having an accepted reporting standard can be complex and difficult.

Lately, a standard that has gained wide acceptance is the Global Reporting Initiative (GRI). According to the GRI Web site, the total number of companies that have published GRI-based sustainability reports since 1999 add up to more than 2,800, out of which 39 are Indian. So how does a company with a strong ESG profile look like? It will have the following:

Public commitment to recognised ESG standards: The company has publicly announced its commitment to a recognised ESG standard (for example, UN GC & PRI, ISO 26000, Global Sullivan Principles, Equator Principles, etc.) and there is no evidence to suggest that the company is in violation of its commitment.

External Reporting: Good public disclosure in key areas of employee, community and environmental activities.

Top reporters will use the GRI framework or report in broad accordance with this framework and will also have independent verification/assurance of ESG performance standards.

External social and environmental reporting linked to internal risk management and incentives. These matters have explicit board oversight.

Proactive stakeholder relations: The company maintains proactive programmes to address interests of stakeholder groups.

No evidence of harmful relationships: No evidence of problematic relationships with non-financial stakeholders, that could impair long-term performance.

In some cases, companies producing sustainability report/ESG disclosure are still not confident about the usefulness of the same. It may, therefore, be worthwhile to spell out the benefits.

It helps a company evolve a strategy for mitigating risk and tap new market opportunities; and enhances external relationship and credibility. It is fast developing as a way to link the discrete and insular (for example, finance, marketing, administration, purchase, research and development) functions.

It helps realise business value through better assessment and communication of information related to their ESG performances. It prepares a company for regulatory requirements even before they become mandatory.

(The author is Director, Economy Research, Crisil Ltd. The views are personal.)

Published on June 26, 2012

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