Governance lapses often put Environmental, Social and Governance (ESG) evaluations under review. When reputed business groups are accused of pulling the ‘largest con in corporate history’, ESG inadvertently gets dragged into it. This isn’t surprising as there’s a growing trend among companies to play the ESG card. They cherry-pick ESG efforts to mislead investors, use ESG as a marketing tool, or a flippant public relations exercise.
These practices, called greenwashing, are unfortunate given that ESG is becoming mainstream for both start-up Davids and corporate Goliaths. It isn’t lost on them that the exploitation of society by businesses is no longer viable in this century. There are many examples of how questionable governance standards can erode billions of dollars of investors’ wealth.
The Volkswagen scandal still resonates. The company lost 46 per cent of its value and incurred huge recall costs. And think of the way Enron executives used dubious accounting practices to inflate the company’s revenues. Similarly, the Foxconn episode — the firm was hit by a wave of workers’ suicides — brought to the fore the perils of ignoring responsible governance practices.
But ESG practices must be embraced in their totality. Adoption of green technology is as critical to the ESG profile of a business as sound employment culture and positive social practices.
Expectedly, investors are engaging with companies that demonstrate positive ESG behaviour. Also, ESG has a proven track record at the bourses. ESGRisk.ai’s study revealed that from April 2020 to March 2022, top-rated ESG companies delivered 16 per cent higher returns than that of Nifty. The top 50 ESG companies could hold their value after the market crashed in 2020.
While the ‘why’ aspect of ESG is clear, the ‘how’ remains relatively uncharted territory. This is where the ESG framework comes into play. ESG principles provide guidelines for investors and companies to make investments safe and businesses more resilient to future shocks linked to environmental, social, or governance factors. ESG ratings establish whether a firm’s sustainability claims are realistic. This scrutiny also brings out any anomalies, helping investors to make sense of thousands of gigabytes of unstructured data.
ESG framework, along with tools such as ESG ratings, provides a safeguard for investors to assess risks. How robust is this framework? On this, the Green Bond Principles (GBP) framework would throw more light. Under this framework, the eligible categories of green projects are well-defined, and issuers of green bonds are expected to have transparent communication with investors regarding the sustainability objectives of the selected projects.
SEBI is implementing safeguards to ensure investors are protected from ESG risks. The recent initiatives include BRSR (Business Responsibility and Sustainability Report) that ensures investors access standardised disclosures on ESG parameters.
SEBI has also proposed an emerging market-specific approach for ESG Ratings Providers (ERPs) who need to consider India-specific standards.
The risks of greenwashing will exist. Data-backed, reliable ESG insights are the need of the hour. ESG assessment framework acts as a screening tool, risk mitigator, and performance driver.
The writer is Group CEO Acuité Group
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