A casual Friday evening barstool conversation turns into a serious conversation around ESG.
Kabir: If this place (where the conversation is happening) is looking at raising private equity funds, it may stand no chance.
Sneha: I agree, look at how much plastic and paper plates and cups are strewn all over. The water tap on the mixing counter is so leaky, someone could bathe here.
Kabir: When funds are choosing investments based on ESG compliance, maybe it should be a criterion for us while choosing hangout places.
Sneha: This is something I don’t understand. ESG is all about environmental, social and governance parameters which are softer aspects. Why should it have a bearing on a company’s fund raising?
Kabir: The idea of ESG has been doing the rounds for years. But it was SwissRe report in 2021 which created ripples. SwissRe is world’s largest reinsurer and it has estimated that 18 per cent of world GDP could deplete if global temperature increases by 3.2 degree Celsius by 2050. It shook investors because such a drastic climate change can wipe off the investible options i.e., operational companies in just 30 years from now. To prevent long-term losses, investors started sieving companies based on ESG parameters. Global ESG focussed ETFs rose by 53 per cent to USD 2.7 trillion in 2021. Total ESG assets (ESG compliant companies)was pegged at USD 35 trillion and is expected to touch USD 50 trillion by 2025.
Sneha: How are Indian companies faring?
Kabir: For now, India is nowhere on the map. In fact, even US just globally fourth on the list. Europe tops the chart and for 96 per cent of companies in Europe, being ESG compliance is an important decision-making aspect. Canada is second, followed by Asia and the US. In India, according to a recent Crisil report based on 586 companies it analysed for ESG parameters, controversies or deviations were spotted in 303 companies. Just 50 per cent of companies under Crisil’s watch have withstood the ESG test. 67 per cent of deviations were governance related, 18 per cent social and 15 per cent environmental issues.
Sneha: Is it mandatory for all companies?
Kabir: Last year, SEBI introduced Business Responsibility and Sustainability Reporting (BRSR). This is different from the existing the current Business Responsibility Report as BRSR would be in-line with global ESG parameters. It would map a company’s ESG risks and opportunities, sustainability related goals and targets, environment-related targets such as carbon footprints, greenhouse gas emissions, gender diversity, compensation diversity, disclosures on cyber security, data privacy, consumer complaints. In FY21, for top 1,000 listed companies adopting BRSR was optional. Come FY23, its mandatory for all.
Sneha: What exactly is measured by way of an ESG ranking?
Kabir: While there is limited literature on ESG in India, largely for tech companies and pharma companies, the focus is on gender diversity, pay equality, compensation structure, attrition rates. In fact, recently Infosys CEO Salil Parekh was in news for his big fat paycheck hike, thanks to the ESG related disclosures as part of the company’s annual report. For companies in the energy sector, focus is on whether emission norms and compliance with environmental requirements have been met satisfactorily. The idea is to measure what companies are doing with respect to conserving air, water, land and human capital usage. The end-game is to ensure transparency in reporting and strengthening the governance framework. .
Sneha: But what I still don’t understand the relevance of ESG for investors...
Kabir: Until now, investors were looking at tangible factors such as raw material constraints, debt levels and operating efficiencies while taking a call on a company’s profitability and whether they should put their money on it. Now, another layer of intangibles called ESG is being added. Are companies able to make the same amount of profitability while adhering to these intangibles is what investors look for. That said, while we have 10 ESG focussed mutual fund schemes in India, they are now largely underperforming the BSE 100 Total Return Index. But given the scarcity of natural resources including human capital, the noise around ESG may not be a one-off.