ESG frameworks must put people first

Livemint, November 14, 2022

By Pradeep S. Mehta
People should be accorded due priority by organizations aiming for profit without hurting the planet

As CoP-27 in Sharm El-Sheikh, Egypt, puts the environment back in the global news, Environmental, Social and Governance (ESG) proposals have become the flavour of the day.

This is a new formulation of an older triad of ‘People, Planet and Profits’, where people came before the other two concerns. Today, stakeholders, particularly investors, need to reshape the discourse to identify better strategies for the progress of people in a highly competitive world badgered by various debilitating factors.

Good and better jobs through ESG:
High rates of unemployment and a lack of decent jobs have been plaguing the Indian people for years now. The nation needs an alternative, inclusive, resilient and sustainable model of economic growth under which companies strike a balance between three principal organizational goals: maximization of profit, minimization of the environmental burden and enhancement of workers’ welfare. The effective implementation of a sound ESG proposition by organizations egged on by investors would go a long way in helping realize it.

The ESG movement has changed the way large investors and portfolio managers view the risks associated with traditional business models and the potential for sustainable future value creation. Rigorous application of ESG analysis by investors can improve their risk-adjusted returns and increase investment value.

The ESG movement:
The acronym ESG has swelled into a variety of meanings. Depending on whom you ask, it could represent business responsibility efforts, a framework for risk analysis, a dangerous placebo or even an ideological agenda. Without standard definition and uniformity, ESG cannot serve its purpose. It is not a one-time or unidimensional process. All three pillars must be looked at in conjunction and be given the same value for assessment criteria.

In India, ESG is a relatively new concept among firms and investors, and not many investors explicitly take into account the ESG calculus of a firm while making investment decisions. However, this scenario is slowly changing. For ESG investing to prosper, stakeholders in India first need to identify the material issues hindering the country’s ESG growth potential.

Human capital formation as ‘S’ indicator:
A recent stakeholder consultation by CUTS International under the project Good and Better Jobs, supported by Ford Foundation, revealed that the ‘S’ (Social) element among the three for investment strategies was essentially just a ‘tick the box’ exercise. The Social indicator was found to be the hardest to measure, integrate and analyse in ESG reporting.

This is one reason why investors and companies focus on climate change mitigation challenges as the predominant factor for investment decisions. However, social factors and good governance for the smooth running of a business and attainment of higher profitability are equally important.

First, we need to better understand the indicators defining ‘Social’. Stakeholders and investors have described it in many different ways: social issues, labour standards, human rights, pay equity, workplace diversity, consumer grievance redressal, supply-chain issues, data security, etc. A look into human capital formation and workers’ welfare policies can also make a strong case for Social reporting under ESG. Investors could be strong advocates for such development, which is not the case today.

Human capital refers to the skill sets, knowledge and experience that workers have in an organization. It involves skilling, reskilling and upskilling the workforce (both white- and blue-collar) to prepare workers for future roles along a growth path. Every firm must have a strong relationship with its people for long-term growth.

One size does not fit all:
ESG has become a growing set of unstructured data, but it needs a better targeted approach to measure its three pillars. The focus should be on ‘full consequence investing’. This means a pursuit of profit that’s compatible with considerations of the environment and society.

Additionally, investors need to lead change by engagement rather than divestment, take more enlightened approaches to measurable factors, and welcome more stakeholder-inclusive approaches.

Cost of integrating ESG practices:
While the benefits of integrating ESG practices are clear to businesses, there are several risks and costs involved. This is one of the many reasons that startups seem reluctant to participate in ESG reporting.

The most obvious cost is the investment needed to change current operations. From implementing and upgrading new environmental policies to training costs, all these have an associated cost attached which might not be feasible for cost-watching organizations or early-stage startups.

Apart from the issues highlighted above, there are several other reasons defying the purpose and smooth integration of ESG in India. There is no reliable ranking system or standard reporting framework, the cost of integrating an ESG system is high and a skilled talent pool is often missing.

Mitigating the risks of climate change is a major accomplishment for investors. But to achieve true growth, we must focus on corporate governance standards and improving the quality of life of people.
That will help create a more inclusive and sustainable model of economic growth, where people, the planet and profits co-exist harmoniously as organizational goals.

Tanya Goyal of CUTS contributed to this article.
Pradeep S. Mehta is secretary general, CUTS International

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