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BW Businessworld

ESG: Voices Within, For & Beyond

As history has shown, as the countdown to the Net Zero tightens, the polity and policy leaders globally will start taking decisions on behalf of corporate leaders and force tougher regulations and tighter sanctions, including huge monetary penalties

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The term ESG was first coined in 2005 in a landmark study initiated by the United Nations, titled Who Cares Wins. Environmental, Social, and (Corporate) Governance (ESG) refers to the three core themes in measuring the sustainability and societal impact of an investment in a company. These criteria also help determine the future financial performance of companies.

What’s ESG?
Environmental, Social and (Corporate) Governance (ESG) issues concern and impact every company, irrespective of where the company operates. Environmental issues range from climate change, carbon emission concerns, waste management, pollution (air and water). Social issues range from labour issues, modern slavery, under-the-table sourcing practices, product liabilities, privacy concerns and data security. Governance issues range across business ethics, corporate culture that shapes how a company functions and its organisational practices, board impact, enterprise risk framework and granularity of the organisation disclosures.

Environmental, Social and Governance will play a vital role in the very existence, growth and sustainability of purpose-driven companies. The rise of adoption and influence points of ESGs point to a positive way of doing business.

In recent years, investing in sustainable companies has been associated with “doing good” investors. The ESG concept is no more about just that or “investing plus sustainability”. It is now the way of responsible investing. It’s no more a “nice to have” special project in a firm; it is a “must make it part of the organisational DNA” culture and board imperative. The ‘ESGness’ of a firm would neither happen overnight nor can it be bought by simply copying S.O.Ps from an advisor. The ESG will be a continual process in any organisation.

The Covid-19 pandemic has showcased the importance of social commitment, environmental championing and governance values of companies. Many companies have taken up the cause of social impact, as spontaneous response to the suffering all around. They showcase the companies’ true values and commitment to a mission.

‘Net Zero Emissions’ is a term in usage since the Paris Agreement in 2015, where many governments agreed to their commitments to achieve net zero emissions by 2050. Net zero means achieving a balance between the greenhouse gases put into the atmosphere and those taken out.

A country just cannot deliver its net-zero promise, unless it transforms its entire industries’ way of operations as well as the economy. With regulations seeking those changes, businesses are increasingly coming forward with net-zero commitments.

It is natural for many businesses globally to “wait and watch”; and in today’s global economic situation, many of those business leaders could simply procrastinate and postpone taking a large call for investments towards Net Zero challenge.

As history has shown, as the countdown to the Net Zero tightens, the polity and policy leaders globally will start taking decisions on behalf of corporate leaders and force tougher regulations and tighter sanctions, including huge monetary penalties.

Social Licence
Sustainability is not a mainstream story yet, especially in most of Corporate India. It simply cannot remain a “notable mention” in new pages tucked inside the annual report.

Sustainability is specific to a company, or an industry and to a country. Companies need to measure their positive and negative impacts, identify the baselines, and make disclosures in a transparent and a consumer-friendly manner. Regulatory requirement of such disclosures have compelled the act of disclosures, but not necessarily the spirit and details of such disclosures.

A social licence simply refers to the acceptance of an organisation by the community in which it operates. In other words, it is the ability of an organisation to carry out its business, simply because the confidence the (local) society has, that it will behave well respecting all rules and traditions, with accountability and in a socially and environmentally responsible way. The ‘social licence to operate’ is made up of these three elements:

* Legitimacy: the extent to which an organisation operates by the ‘rules of the game’ (the norm of the community, even if they are informal or not coded as law).

* Credibility: the organisation’s ability to provide true and detailed information to the community and fulfil all its commitments on time, without reminders.

* Trust: this aspect of highest quality of a relationship takes time and effort to nurture and sustain. Organisations which think that social licence is something that they can “pay for”, end up with issues of their credibility at stake. Companies with questionable processes often try and “buy such credibility” by giving out community grants (in the form of social funds). This kind of ‘transactional nature of the behaviour’ would ‘break the trust’ that the community has with the organisation.

Even a broken relationship can be mended or healed by carefully rebuilding that trust. Trust, (binary with either “present” or “absent”), assumes that all parties involved would nurture the relationships, based on mutual respect and the highest levels of probity.

Social licence of profit-making entities has to be a full-time engagement. Organisations which champion their communityinitiatives, usually have their best and senior resources overseeing those initiatives. Such organisations ensure that their boards are appraised regularly of the initiatives, however small the projects could be in their balance sheet. It is the guiding principles of those initiatives that matter and not the project-cost-outlay!

ESG - A Journey
To really achieve sustainability, it has to be a top-down, companywide cultural effort.

There are many firms that “rate” the ESG initiatives of entities. Most of them have opaque attributes whose count and quality differs between their industry counterparts. It is surprising that globally the rating agencies have not come together to have a unique global framework including attributes.

“What you measure is what you get”. If you measure the wrong attribute, you can make the data look nice in the final interpretation. Standardisation is key to creating a common language and benchmarks, and therefore a need for transparency. That’s where critical stakeholders have to showcase the hallmark of ESG – “intransparency” .

And this is also where the ESG detractors or naysayers go wrong; however rich and popular they are. Measurement of the ESG cannot be just a number, but has to be seen in the context of qualitative parameters too. Addressing all ESG concerns at once is nearly impossible even for the most forward-looking and wellintentioned companies. The key to success is materiality. The understanding of which ESG risks are relevant to a company’s sector and overall operating context is important.

While ESG seems to be a black-box to some, it looks like the magic moment for many. It’s not as easy as getting the company rated and just spouting the “ESG pride”

Boards usually have governance expertise on business matters. At the beginning of this millennium, climate change became a global debate. It took time for it to percolate to the corporate world as a serious topic that could impact their ‘futurebusiness’ as well as ‘future of business’. With ESG standards gaining momentum across stakeholder groups, boards are discussing issues such as the following:

Societal changes and evolving expectations of the society

Adapting the corporate brand promise in alignment with
ESG objectives

* Various risks including Global risks, country risks and corporate risks.

* Reputational issues

* Disruptive elements in their industry / geography

* Global momentum on ESG and expectations.

ESG - Bringing All Voices Together

The first observation on “social licence to operate” debated the intersection of corporates and communities. The net-zero observations debated the intersection of governments globally and corporates. The ESG measurement is about the assessment of individual corporates. Whereas a successful ESG-way-of-life would be possible only when we have the above three intersect, and work-in-tandem.

Conversations around ESG need to move out of specialist journals, multilateral institutions annual summits and corporate board rooms to classroom debates, panchayat discussions, and populist mass media across various languages! A productive ESG thinking depends on building initiatives that are authentic, inclusive, actionable and focused on driving a real-world result, not just an ESG rating or award. The ESG is not a revolution, but more a mindset-evolution. Just as an ECG can detect a heart condition and potentially save lives, ESG assessment can foretell organisational health! This might be a good starting point for you to think of your ESG journey ahead.

* Do all your stakeholders know your ESG goals? Are all of them aligned in the mission ahead?
* How do you improve the existing ESG standards?
* Do you know of the parameters that make up your firm’s ESG score or ratings?
* How do you improve on the existing processes that impact ESG performance of your firm?
* How do you compete with global benchmarks?
* How do you work-in being an ESG-pioneer in your industry / geography / globally?
* How strong is your ‘social licence to operate’, in the locations your firm operates and serves customers?
* How do you communicate about your ESG initiatives – both to your internal stakeholders and to the external world? After all, “perception is the new reality”.
* You might have “goodness” as a Value. Is it reflected in each of the stakeholder behaviour and processes within your firm?

In this transformational journey to make the world ‘good’, every voice counts and every positive act matters. Capital, human capital and social capital have to come together for sustainable and impactful ESG outcomes.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Srinath Sridharan

Independent markets commentator. Media columnist. Board member. Corporate & Startup Advisor / Mentor. CEO coach. Strategic counsel for 25 years, with leading corporates across diverse sectors including automobile, e-commerce, advertising, consumer and financial services. Works with leaders in enabling transformation of organisations which have complexities of rapid-scale-up, talent-culture conflict, generational-change of promoters / key leadership, M&A cultural issues, issues of business scale & size. Understands & ideates on intersection of BFSI, digital, ‘contextual-finance’, consumer, mobility, GEMZ (Gig Economy, Millennials, gen Z), ESG. Well-versed with contours of governance, board-level strategic expectations, regulations & nuances across BFSI & associated stakeholder value-chain, challenges of organisational redesign and related business, culture & communication imperatives.

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Shailesh Haribhakti

The author is a Chartered and Cost Accountant, an Internal Auditor and a Certified Financial Planner & Fraud Examiner. He is a well-known thought leader on the Indian Economy and Public Policy. He is a Board Chairman, Audit Committee Chair and Independent Director at some of the country's most preeminent organizations.

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