The new non-financial factors which are being weighed in while investors factor in growth possibilities as well as risks are environmental, social and governance (ESG) concerns. As India Inc embarks on the uphill task of achieving climate change mitigation goals, ESG assumes immense importance for the corporate world.
Given the urgent focus on decarbonisation, half measures will not do. Experts agree that ESG is everything when the situation calls for a long-term strategy. The recent evaluation of India Inc by Ambit Institutional Equities vis-a-vis sustainability initiatives presents a mixed bag. While the country’s top 25 companies are moving in the right direction, the majority have only adopted half-measures or have indulged in greenwashing or making false claims of having implemented environment friendly measures.
Notes Nitin Bhasin, Co-head and Head of Research at Ambit Institutional Equities: “With the SEBI mandating the top 1,000 companies to publish Business Responsibility and Sustainability Report (BRSR) from FY23, most companies have intensified their discussions on sustainability. A disclosure based ESG analysis of top 120 companies suggests that there is chaos, flaws in processes, opaqueness and instances of greenwashing. Chaos arises from non-uniformity across sustainability targets, measures, outcomes and guidance. Opaqueness due to weak disclosures and greenwashing is easily possible as ESG laws remain weak and significantly, there is lack of third-party assurance of data on claims.”
True, these are early days of ESG adoption in the corporate sector. Says Vinit Powle, analyst, accounting and ESG: “Appreciation of all stakeholders—society, customers, employees, minority investors and environment— is the cornerstone for sustainability. However, applying global environmental and social checks on Indian companies, without appreciation of the local context may not be the right approach.”
Lack of familiarity within managements about environmental issues, confusing ESG as an extension of Corporate Social Responsibility (CSR) and difficulty in incorporating ESG information into the decision-making process are key challenges.
Tall claims by companies and glossy reports with ESG mentions are in many cases just playing to the gallery. “Today, with evolving standards, ESG labels will get slapped on everything,” says Powle. There are also challenges due to subjective nature of ESG rating models of third-party rating agencies.
In fact, ESG claims of most companies are ridden by non-uniformity around disclosures, setting up targets and objectives, tracking of progress and measuring outcomes. Thus 87 out of 120 companies surveyed have good environment scores, but it is less than half of that when it comes to scores on social and climate action.
Lack of methodical approach
Barely 20 per cent of the top 120 companies are registered with Science Based Target Initiatives (SBTI). This shows that there is no methodical approach to reach net-zero targets. What is significant is that most of the companies even in the top 120 have not taken basic steps such as setting targets for carbon reduction, shifting to renewable energy sources, committing to SBTI, running environment friendly projects and keeping emissions under check. Only sectors like IT, banking, insurance and NBFCs have high scores on sustainability.
Based on the analysis, M&M, Tata Steel, Dr Reddy’s and Marico are among those which fare well in working towards reduction of greenhouse gases through various climate actions. Dealer checks around disposal of lead batteries highlight the dark side of claims on recycling.
To bring down carbon emissions, there is need to restrict the use of coal and generate electricity through alternate sources. Towards this India has pledged to increase its non fossil energy capacity to 500 giga watts (GW) by 2030. At the current pace, the renewable energy targets of 2030 look like an uphill task.
A new mindset
According to experts, what is required is a new way of thinking. Explains Bhasin: “Sustainability requires a very different mindset on the part of managements. Analysts and investors understanding it require a lot of primary work and engagement and not simply desk work. One needs to be aware of India-specific challenges. For instance, insisting too much on renewables and thereby punishing existing coal powered plants will be incorrect as our country faces a deficit in base load power. Increasing dependence on renewables could only amplify power supply problems and lead to bigger social problems.”
Hence, investors rather need to assess a company’s plan to bringing in more energy efficiency, moving towards carbon efficient technologies and strengthening their processes around recycling waste and used products. However, a lot of importance is given to accounting as it is believed that it captures the quality of the business. This is not true in the environment conscious age we live in.