Written By ————
by Karnik Gulati and Loveena Manaktala
How often we used to experience or read about earthquakes until few years ago whereas the frequency has drastically increased in the recent times. No, we should not at all be surprised to know the reason behind the same. Yes, you guessed it right; it’s the climate crisis. The climate crisis is real and happening now. Extreme weather events are becoming more frequent and more intense, with sea levels rising, and fragile ecosystems facing unprecedented disruption. This is where alphabet ‘E’ which stands for Environment comes into play in the ESG framework
On the other hand, even though all around the world there is an inclination towards self-sustainability but, for businesses, it’s not possible to sustain without involving all the stakeholders including its vendors, customers, bankers, etc. This is where the alphabet ‘S’ which stands for Social comes into play in the ESG framework.
Lastly, the talk of the town surrounding around Governance is what alphabet ‘G’ stands for in the ESG framework.
Therefore, ESG, as you rightly guessed, stands for Environment, Social and Governance (‘ESG’). Now let us delve deep to understand it in detail.
What is ESG?
The business case for sustainability has never been stronger. The rise of the responsible investor is forcing companies to think about more than just profit. They must now consider the environmental and social impact of their business. This is where ESG comes in.
It is believed that businesses are uniquely placed to act on climate change both directly and indirectly, by influencing their own operations, and the way their products and services are created and used in the wider world.
The aim of ESG is to create long-term value for an organization by integrating ESG considerations into its overall strategy, operations, and decision-making process. This involves assessing and mitigating environmental and social risks associated with an organization’s operations and supply chain; taking proactive steps to build sustainable and inclusive workplaces; and incorporating best practices for corporate governance.
Why is ESG important?
Businesses that take action to reduce their emissions and address climate change can boost their reputations and make it easier to attract new customers and employees. Customers are increasingly looking for companies that are acting on climate change and showing leadership on this issue. This means that businesses need to take customers’ demands seriously and take action to reduce their emissions if they want to remain competitive in the market.
In addition to customers, employees are also increasingly demanding that businesses act on climate change.
Even the investors especially foreign investors consider ESG a very important aspect before committing their investment to any investee so complying with ESG framework will also ensure brownie points while raising funds. Going forward, even the bankers are expected to have ESG framework as one of the many evaluation criteria before advancing any funds to businesses.
In the long run, another benefit of adopting ESG framework could be cost savings by reduced energy consumption and reliance on renewable energy.
How to tackle the ESG aspects?
Companies must consider their effects on the environment. This includes tracking their greenhouse gas emissions, assessing their supply chain for potential environmental risks, and implementing measures to reduce their resource consumption such as waste and water usage. It also involves exploring ways to capitalize on renewable energy sources such as solar and wind power.
Additionally, companies should strive to utilize efficient transportation methods and reduce their overall carbon footprint.
Companies must assess the social impacts of their operations, paying particular attention to their employment practices, local and global engagement, and supply chain sustainability. This includes promoting diversity and inclusion in the workplace, and fair compensation and labour practices across their supply chain. Companies should also strive to ensure that their operations and products do not create any negative externalities to the public.
Companies must put into place measures to ensure that they are operating in a trustworthy and transparent manner. This includes instituting a rigorous oversight framework and putting into place internal controls to govern their operations. The focus area being related party transactions.
It is often said that any huge task becomes easy if it is divided and distributed amongst many. In this case, putting the onus on the businesses to play a lead role in the ESG framework will ensure collective responsibility and accountability which will take us closer to the target of achieving a sustainable future for generations to come.
This is the first of a two-piece draft, the second part focusing on how is India placed to adopt the ESG framework and the steps taken by it towards ESG reporting.