Mainstreaming of ESG

Business Standard     25th September 2020     Save    
QEP Pocket Notes

Context: The recent departure of Anglo-Australian miner Rio Tinto’s chief executive officer, Jean-Sebastien Jacques, on the grounds of the destruction of two ancient and revered Aboriginal caves in Pilbara, Western Australia, is being hailed as the growing power of “Environment, Social & Governance” (ESG) focus in the business world.

Some Instances of mainstreaming of ESG worldwide

  • Going against the environment is seen as a crime: For, E.g. Departure of Rio Tinto’s chief executive officer on the grounds of the destruction of 2 caves.
  • Investors leaning towards companies performing well on ESG issues.
  • Loss to some companies for going against ESG: Some firms have lost close to $600 billion in market capitalization in the last seven years to  ESG controversies
    • Those who follow ESG are often rewarded: Funds strictly following the ESG mandate globally already account for a corpus of over $2 trillion
  • Rising Financial Support:
    • Funds strictly following the ESG mandate globally already account for a corpus of over $2 trillion, 
    • Even during times of a raging pandemic, global sustainable bond issuances touched $100 billion
  • The European Union (EU) Example: EU has gone ahead and introduced mandatory ESG rules effective from March 2021 for all fund managers based in Europe.

Some Instances of mainstreaming of ESG in India

  • Mandating corporate social responsibility through Companies Act 2013.
  • Social Stock Exchange: Regulators in India are pushing the ESG envelope beyond monitoring a couple of ESG-specific funds or floating norms for Social Stock Exchanges.
      • Business responsibility and sustainability reporting for the top 1,000 firms was recently introduced by the Securities and Exchange Board of India (SEBI)
  • Responsible Business Conduct introduced last year: 
  • Voluntary this year(2020) and mandatory from the next year (2021).
  • The rules require top firms to declare a host of issues around ESG — from energy, water, recycling intensity, disclosure and redressal norms, spends on research to better the firm’s environmental and social outcomes to gender diversity.

Way Forward:

  • India may draw inspiration from global firms and funds: Global firms and funds, with mandatory compliance requirements in their home markets, will perhaps drive the first steps towards ESG compliance in India
  • Importance of corporate governance: We can expect more scrutiny by global capital on the “G” of ESG as corporate governance lies at the heart of most issues that plague the business environment in India.
  • Benefits of complying: listed companies adhering to ESG norms have outperformed others in the last seven of the 11 years ending December 2018.
QEP Pocket Notes