Earth Day: ESG—A Tool to Promote Global Well-Being

The requirement for the top 1000 companies by market capitalisation to submit their Business Responsibility and Sustainability Report (BRSR) has been made mandatory by the Securities and Exchange Board of India (SEBI) from the financial year 2022-23. Here's an article authored by Nawneet Vibhaw, Partner in the Environmental Law practice at Shardul Amarchand Mangaldas & Co.—on the occasion of Earth Day—shedding light on the value of ESG reporting in promoting sustainability and well-being across the globe.

The requirement for the top 1000 companies by market capitalisation to submit their Business Responsibility and Sustainability Report (BRSR) has been made mandatory by the Securities and Exchange Board of India (SEBI) from the financial year 2022-23. For the financial year 2021-22 this reporting could be done on a voluntary basis. This is the first step by any regulator in the country to promote sustainable investments by ensuring that investors, be it funds or companies assess the performance of their targets on Environmental, Social and Governance (ESG) parameters before making investment decisions.  

SEBI has introduced reporting formats for top 1000 companies and even for those which do not fall in the top 1000 list. These formats are in consonance with the internationally accepted reporting frameworks. Noticeably, in September last year, five framework and standard setting institutions namely Caron Disclosure Project (CDP), Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) released a statement of intent to work together towards comprehensive corporate reporting. This meant that the reporting framework across the world would largely be uniform. Since the BRSR format introduced by SEBI is based on these frameworks, it will help Indian companies adhere to the global standards. 

ESG includes within its ambit a wide range of environmental, social and governance factors, which cater to multiple stakeholders. While the investors can evaluate themselves and set minimum standards that the companies need to abide by in order to obtain funding, the companies can use these ESG factors to assess themselves and monitor their performance on various parameters. Businesses are increasingly incorporating ESG factors in decision making for minimising risks and maximising profits. Civil society groups, including non-governmental organisations (NGOs) can also use these factors as a tool to ascertain the impact of business activities on the society. 

European Union (EU) has moved towards regulations requiring investment firms to disclose the environmental sustainability of their investments and whether such investments have been able to achieve the desired objectives. Efforts are being made to promote transparency in operations. New Zealand has made it mandatory for all banks, asset managers and insurance companies with more than NZ$1 billion in assets to disclose their climate risks, in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Countries like Canada are also taking steps in this direction.

The Principles for Responsible Investment (PRI) are a great set of principles devised by investors at the instance of the United Nations to incorporate ESG parameters into investment practices. The principles call for incorporating ESG indicators into investment analysis and decision making, as also the ownership policies and practices. It seeks appropriate disclosures from target companies and also calls for the promotion of these principles in the investment industry. Working together to enhance effectiveness and report on activities and progress in the implementation of the principles is an essential part of these principles. 

With the focus on achieving the Sustainable Development Goals (SDGs) by 2030, ESG is a very effective tool to help achieve such targets. ESG parameters will also help assess and finance the initiatives to achieve the SDGs in the years to come. ESG is a great tool for banks and financial institutions to promote sustainable practices. More importantly, it will help companies in staying ahead of the regulatory tide and prepare to adhere to the critical technical standards and specifications which are yet to be finalised. ESG is a great tool to instil discipline into non-financial reporting processes thus building confidence and trust. With the focus back on climate action and the world community struggling to fund the mitigation and adaptation measures, the ESG parameters could serve as a guiding tool to help finance initiatives which will help in curbing the environmental and social impacts of climate events. 

Reducing emissions and transitioning to a low carbon economy can only be facilitated by a transformation of assets and behaviour for which trillions of dollars of financing is required.  Banks can become an active part of this transition to a low carbon economy by adopting a strategic approach at the board level and allocate resources to build the business case and competence for sustainable finance. 

With increased focus on climate action and countries being urged to commit to ‘net zero targets’ and nationally determined contributions (NDCs), ESG reporting will go a long way in achieving these climate goals and promote global well-being. ESG could very well be used in impact underwriting to focus on issues relating to resource depletion, health and safety, climate change, waste, water and pollution, apart from those relating to governance, corruption etc. It could be effectively used as a tool for the conscience-keeping of companies to guide them to promote sustainability and well-being across the globe.    

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