Demystifying ESG
Lately, ESG has become a buzzword - it is used casually in conversations and the label 'ESG compliant' is attached to any and all modes of operation; but when applied in such a variety of contexts, the idea of ESG seems to almost lose its meaning – or at least, its definition gets muddled.
The principal rationale of employing ESG principles in an organisation is to marry environmentally sustainable company activities with fair labour practises and running the company in a responsible fashion where the management is ethical and accountable.
Since the nature of these considerations are long-term minded and hence looks to hedge long-term risks, ‘outsider stakeholders’ (i.e. investors) regard a high level of ESG focus as a risk-reducing quality and a proof that the management is planning for the long term wellbeing of the asset.
Supporting the rationale to elevate the ESG agenda is the consistent push from regulators and authorities - nationally and internationally - which increasingly introduce new reporting requirements on ESG-related data, such as SEBI’s mandatory guidelines.
Moreover, employees will be more motivated and productive by being part of a purpose-led company that walks its talk on sustainability, fairness and ethical business practises.
This will ultimately enable the organisation to attract better talent and - increasingly so - attract more clients.
The ESG Imperative
Sounding good or looking good?
As ESG gains currency, so will the expectations of its implementation quality, data credibility and uniqueness. We predict that inaccurate ESG reporting will soon be considered as fraudulent as incorrect financial reporting. This reality will hit some players harder than others - especially those engaged in greenwashing, which, due to its increasing chance of exposure, will risk damage to the brands’ reputation over the long term.
Some critical regulatory movements backing the shift towards a new era include the United Nations Guiding Principles on Business and Human Rights, which spell out the Business Responsibility to Respect Human Rights, The Global Reporting Initiative’s pioneering standardized ESG reporting frameworks, the EU Taxonomy for sustainability reporting, SEBI’s mandatory disclosure requirements for Business Responsibility and Sustainability effective from 2023, among others.