Kuldip Maity

As I move on to the ‘S’ segment of the ESG blog, I would like to acknowledge this segment as the most significant factor for screening any company’s potential.

A society, simply put, is a circle of individuals coexisting based on sets of norms that keep it sustainable.

The ‘S’, deals with the social aspects of investment sustainability. The term ‘social’ itself is quite a diverse concept and requires a lot of exploring; although the ESG perspective of the society explains all norms that would maintain human relationships complimenting the workforce, the society, and the political environment within which it exists.

The composition and workforce are the roots of a business. We have seen in multiple instances that a labor strike can make an entire business tumble down.

The business is built on the coexistence of humans and hence has one factor that acts as a chain of its sustainability—relationships. A company’s relationship with its employees, customers, and suppliers are the defining factors that facilitate or dampen its growth. For example, if an employee does or not like working in the company or the wages, the question will always persist whether they would walk the extra mile for the sake of organizational progress. We may keep talking about professionalism in the workplace, but my personal experience says that it is foolish to ignore human emotions and treat them as robots. A company’s employee interest directly relates to its financial profits.

Not only do the internal relationships affect the company, but its community relations also determine the kind of path it traverses. Social evolution is an essential pillar of human rights, and through ESG strategies, a company needs to assure with preventive measures against any human rights violation, internally or as an impact on the communities around.

Although a company cannot be held responsible for how the various ancillary organizations of its supply chain function, investors normally steer clear of companies that maintain integral relations with those with poor human right policy records.

EHS (Environmental, Health and Safety) is also a significant factor in evaluating the “S” component. The concept of EHS is based on the health and safety of company workers and the environment they work in. A company that is likely to put people at unnecessary risk has been usually condemned by the general public. The EHS is practiced in organizations that strive to maintain a good workplace policy.

Lastly, I would like to mention that diversity does not mean to be just a political discussion. Be it race, gender, status, or ethnicity, promoting diversity reflects well on the company in the public eye and increases the rate of productivity. Discrimination has always been a two-edged sword, for which we should have zero tolerance.

To sum up, the ‘S’ component reflects the social responsibilities of a company and is essential for sustainability.

In this blog, I shall focus on the ‘E’ factor of ESG.

The environmental criteria are set based on how the operations have an impact on nature and natural resources, both directly and through its ancillaries. Managing environmental risks is the core of the E in ESG, as it has a direct impact on the sustainability of the organisation, thus leading to investment decisions.

The ultimate goal of the E is to reduce the risk of environmental risks and harms and set policy benchmarks to mitigate them. For example, let me try citing the business of leather processing. If the company continues its operations where the harmful chemicals are dumped in the sewage, which goes to mix in the water bodies, it is just a matter of time before the climate activists (or even the common people) will force the regulatory bodies to invoke actions that may lead to huge production losses and financial risks. Needless to say, no investor would like to pump in funds in such a situation. A company failing to have a proper plan to tackle environmental challenges is guaranteed to suffer downfalls.

Broadly the factors include a few critical aspects of the natural environment around us. We need to evaluate how the company operations use natural resources such as land, water, greenery and other critical non-renewable elements. How disposal of waste and the resultant pollution is handled is also an aspect that needs to be delved into. Let me remind you that in all aspects it is not only the direct impact but also the impact on the entire supply chain that is to be measured while evaluating the risks.

With this background, let us sum up how a well-projected 'E' criteria can impact an organisation:
A company with strong controls over environmental norms has goodwill in the market and the confidence of its investors,
If applicable, the demonstration of responsibility towards the environment helps in expanding the markets, resulting in growth,
In the long-term, well-executed ‘E’ risk mitigations help in reducing costs,
Employee morale increases, resulting in enhanced productivity,
Environmental-friendly propositions enhance the probability of a high return on investment and promise more sustainable opportunities.

Companies that ensure environment-friendly controls in their growth strategies often outperform their peers.

After I wrote the last blog on ESG, a few came back asking me for further clarity on the two terms used frequently by corporates whenever they talk about sustainability — CSR and ESG.

CSR or Corporate Social Responsibility is the initiative taken by a corporate to give back to the community. This may include either or all of the four areas of environmental, philanthropy, economic, and ethical responsibilities that the corporate has toward providing a positive social impact. Businesses often use CSR to build a positive brand image while making a difference in the world around them, but not necessarily inside the company.

CSR would involve activities beyond the regular operations of the organization, often through a third-party specialist like an NGO. While the activities might involve the employees, it is hardly mandated but involves more about the motivation to volunteer. The best part of CSR is that it touches multiple segments like the company, its employees, society as well as NGOs through which the initiatives get executed. When we discuss sustainability in the context of CSR, it relates more to the holistic aspects beyond the organization.

On the other hand, ESG is more aligned with the company operations and its financial reporting, with a direct impact on the sustainability of the business. The type of business, its infrastructure, and size, the employees, the business model, and innovation, all are included in the discussion, as ultimately the performance is regarded from a holistic aspect. The focus has shifted from being solely on profitability to the ethics that is held by the organization, as that is regarded as having a longer-term vision and viability of sustenance.

As ESG is more compliance-oriented, there is more importance given to the data than is done in CSR. This when compared against international frameworks, ratings and standards brings in an extent of the relation between ESG disclosures and business performance. On the other hand, CSR outcomes are generally not directly included in business performance reporting, other than the budgetary numbers.

To sum it up, while both are oriented towards the greater good of the world we live in, ESG involves managing material, environmental, social, and governance risks and opportunities of the business as a part of its strategy. CSR is important to develop a public opinion on the credibility and sense of responsibility of the corporate, while the importance of ESG reporting will keep gaining importance in the eyes of the investors.

The recent buzz that we are hearing often in the corporate world is that of ESG or environmental, social and governance. Compliance with ESG goals is becoming extremely important, not only for statutory reasons but also to showcase the responsibility the corporate carries as an organization.

As it is a fairly new term, many may not be aware of what ESG goals are. ESG goals are a set of norms that apply to a company’s operations to adopt better environment-friendly practices, showcase social responsibility and implement better governance.

Environment: As a member of corporate India, we are expected to perform as a steward of nature. Not only are we expected to refrain from actions that harm our environment, but our policies should also be to ensure that the present crisis faced by us is reversed to the best of our capabilities.

Social: While Corporate Social Responsibility has been a mandated norm for many years now, there is still a need to put extra effort to ensure that life and living conditions improve not only within the organization but direct and indirect stakeholders of the company and the social communities also benefit from its growth.

Governance: Anyone having an iota of interest in the business world, would not oppose better measures put in place when it comes to corporate leadership, executive pay, audits, internal controls, and shareholder rights. We need to understand that an organization is successful only when all its stakeholders enjoy the benefits, but within the limitations laid down in the policies.

The pillars of ESG are quite extensive and are difficult to address in a single blog. However, I will try and explore them in the subsequent weeks.

I feel ESG is a welcome structure to follow, as it captures all angles of business and society. While it may not reflect on the financial performance of the organization, it has its effects on its sustainability. However, there is a lot of confusion around its reporting structure and compliance. These, I am sure, will go as we progress in our journey.

Lastly, I would like to state that as a popular measure, we have been focusing a lot on the ‘E’ and the ‘S’ aspects. But no one can deny that every organization also needs a strong ‘G’ in place without which we can hardly get the benefits we are targeting to avail ourselves through ESG. So, it will be fair to say that our earlier path was not wrong, ESG goals are just an added measure.