Aside from regulation, a range of voluntary reporting frameworks and rating agencies have burgeoned, each having developed their individual requirements and evaluation criteria in relative isolation. Given investor pressure, a lot of corporates today, are thus focused on navigating and faring well across this complex maze of disclosures. Consequently, while conversations on benchmarking are recurrent, there is limited dialogue on clearly defining a vision and aspirations regarding what the sum of the parts should look like, and how they can strategically reinvent themselves to get there.
However, in order to be able to maximise opportunities, corporates today need to be able to use ESG transformation as the motivation to drive real change, innovate and create long term value, towards walking the path from a reactive compliance driven approach to a transformative value driven approach.
Key drivers of ESG transformation
Be it consumers or investors, the demographics are changing and so are preferences, offering greater scope for innovation of products and services. For example, there is growing demand for climate friendly or lower Greenhouse Gas emission product alternatives, and eventually we may see a sizeable greenium developing for several products while it exists only for a few today. Driven by this motivation, diversification or reinvention would also render a company more resilient to market disruptions or shocks. Hence, a value centric approach today, is a win-win for companies as well as nature.
Access to finance is also increasingly becoming dependent on ESG performance. In the last few years, several ESG focused collaborations and venture funds have been launched, with PE funds preparing their own ESG focused strategies. ESG indexes for the stock market have, on an average, shown higher growth than traditional indices since their inception. In terms of employee retention, studies have shown that millennials prefer to work for organisations that share a common vision and resonate with their values when it comes to environmental sustainability or impact on society. So greater ESG focus today can deliver positives on many fronts. On the other hand, poor ESG practices can lead to significant losses in revenue and reputation, and there are several examples of companies with poor governance mechanisms that have found it challenging to recover from those fails.
The future of ESG in India
As Business Responsibility and Sustainability Reporting (BRSR) expands in terms of breadth of coverage and sectors over time, there will be increasing pressure on companies to disclose their ESG strategies and impacts more comprehensively. More recently, the Securities and Exchange Board of India (SEBI) approved the regulatory framework that introduces BRSR core and brings assurance into the ambit, which will also be applicable to the value chain of the obligated companies. As these requirements are phased in, it could allay many of the greenwashing and credibility concerns that plague stakeholders today. A host of regulations have been introduced globally as well that will directly or indirectly impact our markets which includes the EU Corporate Sustainability Reporting Directive (CSRD) and Carbon Border Adjustment Mechanism (CBAM). The ISSB which aims to attain convergence of sustainability disclosure standards could also be a game changer for reporting.Digital could also be a big enabler in not just informing but also driving transformation as well as disclosure. The demand today for bottom-up data is huge, not just across a company’s own operations but also across their supply chains. There are plenty of performance metrics that could be material to an organisation, and as assurance is systematically introduced in the disclosure regime, the focus on measurement and monitoring of these metrics will multiply. It’s only with the aid of digital tools can such data be captured efficiently and utilised effectively to power an organisation’s strategy and implementation. In the medium term, it would be a sensible move for companies to embed ESG reporting into core ERPs, just the way financial reporting requirements are integrated.
Several global financial institutions are also focused on building their data analytics capacities by deploying data mining and machine learning techniques to collect and assess ESG data. A growing number of manufacturing industries are now deploying AI and the Internet of Things (IoT) to optimise their processes and enhance energy efficiency. Remote-sensing technology and AI are proving to be a critical enabler of decarbonisation and resilience even for the agricultural sector, providing timely and actionable insights to farmers as well as agri-businesses.
As complexities rise, the only way to efficiently capitalise on the transformation opportunities is to fully imbibe ESG into core value propositions. In working towards that objective, companies should not only focus on assessing where they are today in holistic terms, but also on attempting to understand what the economy of the future could look like as they set aspirational goals for themselves.
The writer is Associate Partner, KPMG in India.
