This week, the Biden Administration will host a virtual Leaders’ Summit for Climate where it is expected that countries will be asked to make stronger commitments to immediate climate action. India is a top bi-lateral priority for the US and is a recognised global leader in renewable energy generation. Under the Modi Administration, India is on track to achieving its climate ambitions, one of the very few countries able to make this claim.
To continue its progress, businesses in India will increasingly need to prioritise environmental, social and governance (ESG) standards. They represent the biggest threats we face as a society. The ‘E’ in ESG will be under particular scrutiny at the Climate Summit.
ESG metrics provide a basis for stakeholders to judge how businesses respond on societal impact measures such as carbon emissions and workplace diversity. In a global investor round-table last year, PM Modi endorsed this trend towards ESG investing — a discipline that, in effect, ensures that capital from influential global funds flows past companies that fail to adopt ESG norms.
Interactions with business executives around the world reveal that the businesses of tomorrow must have ESG at their core if they are to survive and thrive.
Business is not alone in making this significant shift in calling for better reporting of ESG. Regulators and other stakeholders are setting the pace for instituting global standards of measurement for ESG performance. Deloitte, along with the other Big Four professional services organisations, collaborated with the World Economic Forum’s International Business Council and Bank of America last year to identify its Stakeholder Capitalism Metrics.
A set of 21 universally comparable disclosures focussed on people, planet, prosperity and governance — those metrics most critical to business and societal conduct — were identified. These metrics, drawn from existing standards, will help lead to greater convergence, consistency and acceptance in the reporting and measurement of ESG actions.
The vision is for a more accountable business community. Data show that companies that embed ESG into their internal practices and along their value chains are better placed to mitigate risks arising from climate change, poor governance and worker exploitation. This is the resilience that investors look to reward with higher valuations.
The link between ESG compliance and global fund flows is becoming explicit — but it should become non-negotiable. Bloomberg forecasts global ESG assets will exceed $50 trillion by 2025, representing more than a third of the $140 trillion in projected total assets under management.
In India, the number of ESG funds has more than doubled in the past six months. That’s an incredible pace but it could be even faster if there was more clarity to highlight investment opportunities in Indian companies where ESG is embedded. While businesses that adopt the new ESG standards stand to benefit, the reverse is also true. As decisions about allocation of global funds increasingly revolve around ESG parameters, ESG laggards will suffer.
The good news is that in India, international funds have long invested in the largest companies, attracted by governance norms and historic ‘social capitalism’ that parallels much of what is now known as ESG. SEBI, the market regulator, recently made it mandatory for the top 1,000 listed companies to adopt an ESG model, known as Business Responsibility and Sustainability Reporting (BRSR), beginning 2022.
The SEBI model was designed to dovetail with global ESG standards — the Global Reporting Initiative, Sustainability Accounting Standards Board, and the Task Force on Climate-related Financial Disclosures. What is laudable is not just BRSR itself but SEBI’s commitment to align with other standard setters. It reflects the kind of global cooperation needed to achieve a universal platform of regulatory oversight on ESG. This model will be essential as we look to the prospect of a definitive global baseline of sustainability standards, established under the auspices of the IFRS Foundation.
There are those who argue that the playing field isn’t level when it comes to ESG activity in India because only large companies can participate. This isn’t entirely true. ESG is making its way into mid-sized and small companies — a critical segment of India’s economy. But these smaller businesses may be constrained from doing more than the minimum on ESG because of capital costs and/or lack of expertise in implementing such measures.
One hopes change is coming on this front — typified by commitments at the Earth Summit — and that there will be increasing regulatory, institutional and stakeholder pressures to ensure wider adoption so we can prevent ESG compliance from becoming a box-ticking exercise. Discussions with stakeholders indicate that BRSR reporting should include all companies in energy and environment-sensitive sectors regardless of their size.
If these and other Indian companies embed ESG in their operations, then India will benefit. Global funds will respond with the capital flows that the Indian economy requires — bringing a $5 trillion economy not only within reach but into the rear view as India surpasses its own aspirations.
The writer is Deloitte Global CEO