Companies, government need to focus on ‘S’ in ESG to build human capital

Moneycontrol, May 18, 2023 

By Pradeep S Mehta & Yatika Agarwal

India is at a critical juncture in its economic development path, which has the potential to lay the foundation for good and better job creation. However, it has been observed that India is facing the problem of jobless growth. The GDP growth rate so far in 2023 is 6 percent but theunemployment growth is also 8.11 percent. Thus, it becomes pertinent to prepare our people for new jobs by investing in skilling, re-skilling, and upskilling, and thus shore up our human capital.

There is empirical evidence pointing to the existence of a positive correlation between firms’ welfare and workers’ welfare. This means that there are positive returns in terms of productivity and profits if a firm invests in the welfare of its workers including their upskilling.

In this light, CUTS International, under the project Good and Better Jobs, supported by Ford Foundation, conducted stakeholder consultations with investors to understand their views of considering workers’ welfare while investing in any firm. In order to better understand the situation, we consulted with equity investors (including venture capital funds, startup funds, fully invested impact funds, and medium-scale funds) and debt investors (including debt providers, bankers, and non-banking financial companies).

The S Factor of ESG

From the stakeholder consultations, it sadly appears that investors do not largely consider social aspects such as workers’ welfare while making investment decisions. For instance, medium-scale investors, banks and NBFCs do not take into account social aspects but focus mainly on financial aspects while investing. These categories of investors who are debt investors rather believe that equity investors should consider workers’ welfare in decision-making.

Through the perspectives of equity investors, we understand that impact investment fund investors look closely at the social aspects of the firm’s operations. This is because their returns are partially from financial and social aspects. Other categories of equity investors, such as venture capital funds and startup investors have also started taking into account the social aspect of workers’ welfare through the lens of the Environment, Social, and Governance (ESG) movement. They are of the opinion that not applying the ‘S’ factor of ESG by the firm might be a risk factor for the investors.

Moreover, some private banks and NBFCs have also started ESG reporting and covering the social aspects. But, some of the investors believe and have said “ESG is more of a western concept and for developing countries like India, a specific model needs to be evolved first”. So, it is apparent that ESG is not one of their primary considerations at present, but likely to be more important five years from now.

Ensuring Workers’ Welfare

Here it is worth noting, while ESG is still developing, all investors in principle agree on one thing, which is the importance of workers’ welfare. They believe looking at workers as investment rather than as cost is a step in the right direction.

As we have also advocated in the past and further through these stakeholder consultations, ESG has emerged as the best vehicle to ensure workers’ welfare is well taken care of. But, the definition of ESG has to be clarified and its principles need to be contextualised for the Indian context.

As per our assessment, venture capital funds and investors are not likely to change their perspective on workers’ welfare dramatically in the short run. However, the growth of ESG influence on investors can create an opportunity for investors to seriously look at the ‘S’ factor.

Even the government of India is taking steps and the Reserve Bank of India (RBI) has taken cognisance of ESG. The RBI has come out with a draft policy paper on environment but is yet to take up ‘S’ part strongly. We recommend that the RBI can consider making a code of conduct/guidelines for considering all aspects of ESG while making lending decisions. This may move the banking system forward on this and promote human capital.

Similarly, the Ministry of Corporate Affairs (MCA) has already come out with business responsibility guidelines and the Securities and Exchange Board of India (SEBI) has been active on ESG and has introduced Business Responsibility and Sustainability Report (BRSR) framework for the top 1,000 listed companies. However, more depth should be added to these frameworks, so as to cover a major part of the medium sectors.

In alignment, we also believe that the ESG framework should be evolved and drafted in a simpler manner for the Indian context so that it could be easily understandable and adopted by Indian firms to attract investors. Needless to say, awareness generation programmes should also be conducted to promote the adoption of ESG by firms, especially for small and medium enterprises (SMEs) that contribute significantly to the GDP and employment generation in the country.

Once the firms/companies start attracting investments and investing in human capital to provide better working conditions and training opportunities to skill, re-skill and upskill the workforce, it will prepare them for future-ready jobs and also help to attain economic growth and employment.

Pradeep S Mehta and Yatika Agrawal work for CUTS International, a global public policy research and advocacy group. Views are personal, and do not represent the stand of this publication.

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