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What exactly is ESG, and why is it so crucial for businesses of all sizes?
ESG acts as a comprehensive framework for evaluating a company’s performance beyond just its bottom line. Here’s a closer look at each of the three pillars:
The environmental factor in ESG is a critical component for businesses looking to operate sustainably and responsibly. It goes beyond simply complying with regulations and focuses on minimizing a company’s negative impact on the planet while maximizing positive contributions. Here’s a breakdown of some key areas within the environmental factor:
Greenhouse Gas Emissions: A significant focus is on measuring and reducing greenhouse gas emissions, particularly carbon dioxide, an important contributor to global warming. Companies can achieve this through energy efficiency improvements, adopting renewable energy sources like solar or wind power, and investing in carbon offset projects.
Energy Efficiency and Renewable Energy Adoption: Reducing overall energy consumption is crucial. Companies can implement energy audits to identify inefficiencies, upgrade equipment to be more energy-saving, and explore alternative energy sources.
Water Stewardship/ Conservation: Water scarcity is a growing concern. Companies can implement water conservation measures, treat waste water for reuse, and source water responsibly.
Sustainable Materials Management: Using recycled or renewable materials, minimizing waste generation, and practicing responsible sourcing of raw materials are all essential aspects.
Biodiversity and Conservation: Protecting ecosystems and biodiversity is essential. Companies can minimize their impact on natural habitats, source materials from sustainable forestry practices, and support conservation efforts.
Pollution Control: Air and water pollution mitigation efforts.
Biodiversity: Conservation practices and responsible sourcing of materials.
The social factor in ESG focuses on a company’s relationships with its employees, stakeholders, and the broader community. Here’s a closer look at the key aspects that make up this crucial pillar:
Labor Practices: This encompasses fair wages, safe and healthy working conditions, respect for worker rights, and adherence to labor laws. Companies should also strive for diversity and inclusion initiatives to create a fair and equitable workplace.
Employee Well-being: Promoting employee well-being fosters a positive work environment and reduces turnover. This can involve offering benefits like healthcare, parental leave, and programs that support mental and physical health.
Human Capital Development: Investing in employee training and development programs enhances skills, improves employee engagement, and prepares them for future opportunities.
Ethical Sourcing: Companies have a responsibility to ensure ethical practices throughout their supply chain. This includes fair Labour standards, avoiding human rights abuses like child Labour, and providing safe working conditions in supplier factories.
Transparency: Transparency in supply chains allows companies to identify and address potential social and environmental issues within their supplier network.
Social Investment: Companies can contribute to the well-being of the communities where they operate through philanthropic initiatives, community development programs, and local partnerships.
Social Impact Assessment: Evaluating the company’s social impact on the community can help identify areas for improvement and ensure positive contributions.
Product Quality: Ensuring product safety and quality builds trust with customers. Companies should have robust quality control measures in place and be transparent about product ingredients and potential risks.
Customer Service: Providing excellent customer service fosters customer loyalty and trust.
The Governance factor of ESG includes the internal systems and processes that a company uses to function. Strong governance fosters transparency, accountability, and ethical decision-making, ultimately leading to a more sustainable and successful business. Here’s a breakdown of the key areas that make up this critical pillar:
Board Diversity: A diverse board with a mix of genders, ethnicities, and backgrounds brings a broader range of perspectives and experiences to decision-making.
Independent Directors: Having a significant portion of independent directors on the board helps ensure objectivity and reduces conflicts of interest.
Board Expertise: Board members should possess relevant expertise and experience to effectively oversee the company’s strategy and operations.
Fair and Transparent Pay: Executive compensation packages should be linked to company performance and avoid excessive pay compared to employee wages.
Performance-Based Compensation: Tying executive compensation to achieving pre-defined sustainability goals can incentivize positive ESG performance.
Proactive Approach: Companies need to identify and manage potential risks related to ESG issues, such as climate change regulations, labor unrest, or data security breaches.
Risk Mitigation Strategies: Developing and implementing effective mitigation strategies is crucial for minimizing the impact of potential ESG risks.
Anti-Corruption Measures: Having a robust anti-corruption program helps prevent bribery and other unethical practices.
Transparency in Reporting: Companies should be transparent in their financial reporting and disclose relevant ESG information to stakeholders.
Compliance with Regulations: Ensuring adherence to all relevant environmental, social, and governance regulations demonstrates a commitment to responsible business practices.
There’s a growing consensus that strong ESG practices benefit not only the environment and society but also the companies themselves. Here’s how:
Financial Benefits:
Strategic Benefits:
Societal Benefits:
Overall, ESG is not just a feel-good initiative; it’s a strategic approach that benefits companies, the environment, and society as a whole.
Building a Robust ESG Structure: Putting Principles into Action
Integrating ESG principles requires a strategic approach, not a separate department. Companies can take the following steps:
ESG is not just a trend; it’s a shift towards a better future. By embracing ESG principles, companies can create a more sustainable future for themselves, the environment, and society. However, achieving true sustainability requires collaboration. Investors, regulators, consumers, and businesses all have a role to play in holding companies accountable and driving positive change.
In India, the Securities and Exchange Board of India (SEBI) has notified ESG metrics within the Business Responsibility and Sustainability Report Core (the “BRSR Core”). Introduced in July 2023, the BRSR Core is a set of mandatory ESG disclosures that the top 150 listed entities in India must report on, starting from the financial year ending March 2024. The BRSR Core consists of key performance indicators (KPIs) under nine ESG attributes (including greenhouse gas, water, and energy footprint, embracing circularity, enhancing employee well-being, etc.)
ESG reporting in India began in 2009 when the Ministry of Corporate Affairs (MCA) issued guidelines on corporate social responsibility. Since then, the reporting framework has evolved significantly with the introduction of business responsibility reports (BRRs), national guidelines on responsible business conduct, and business responsibility and sustainability reports (BRSRs).
The SEBI made it mandatory for the top 100 listed companies by market capitalization to file a BRR capturing their non-financial performance across ESG factors. In May 2021, the SEBI expanded the BRR and replaced it with a new BRSR, effective from the fiscal year 2022–2023. Moreover, the SEBI mandated that the top 1,000 listed entities, by market capitalization, include a BRSR in their annual report. The BRSR Core, operational from FY2023, reflects the SEBI’s dedication to promoting transparent and sustainable business practices. This framework establishes specific parameters for ESG reporting. The reporting format is divided into three sections:
With increasing awareness among organizations regarding the environmental repercussions of supply chains, the BRSR Core advises companies to disclose their value chain ESG metrics (a value chain shall encompass the top upstream and downstream partners of a listed entity, cumulatively comprising 75% of its purchases/sales (by value) respectively).
Global practices regarding ESG regulations have undergone significant developments. Several prominent global ESG and sustainability frameworks have gained widespread acceptance among businesses, including the GRI, CDSB, and UNGC. The EU has established a robust ESG regulatory framework by adopting a set of mandatory ESG reporting standards, the ESRS, in July 2023. It requires companies to provide detailed sustainability information regarding their direct operations and supply chains. These standards are a subset of the Corporate Sustainability Reporting Directive (CSRD) and shall be implemented in phases.
The UK enacted two mandatory ESG disclosure laws in 2022, which included:
In the UK, ESG regulations are scattered among various domestic and EU-derived legislation, such as the Companies Act and the Corporate Governance Code, which guide board leadership, risk, and internal control practices and collectively aim to enhance transparency. Additionally, since 2023, ESG reporting in the UK has been governed by the SDR, which provides a framework enabling businesses to manage sustainable practices, possible risks, and repercussions while also defining measurable goals and targets.
The United States is still undergoing a shift from a voluntary to a compulsory ESG regulatory framework, aligning with the EU’s standards. A significant development is the Securities and Exchange Commission’s proposal, “Enhancement and Standardization of Climate-Related Disclosures for Investors.” This initiative mandates public companies to include climate-related data in their public disclosures.
It is worth noting the global trend towards similar ESG metrics, although the specific details and compliance requirements may vary. For example, the EU’s ESG disclosure requirements set particular metrics for companies to report on environmental aspects (climate, pollution, water and marine resources, biodiversity, and ecosystems) and social aspects (welfare and rights of workers at each level of the value chain), among others.
Similarly, in India, ESG metrics focus on greenhouse emissions, water footprint, employee well-being, gender diversity, inclusive development, etc. The similarity in overall metrics between the EU and India indicates a global trend towards standardization in ESG reporting. This provides investors with a more precise and more consistent view of companies’ sustainability practices and performance across different regions.
ESG is important now and will be crucial for every company’s future. Here at Mercurius, we offer guidance to help companies comply with the latest ESG standards, enabling them to grow sustainably. Feel free to contact us regarding this important matter.
