The Arun Duggal Centre for ESG Research (CESGR) at the Indian Institute of Management Ahmedabad (IIMA) recently initiated a research project with Dun & Bradstreet to develop a first-of-its-kind data product for ESG impact assessment in India. The project is designed to empower organisations by addressing crucial data gaps in ESG impact assessment. It will also create valuable tools, aiding businesses, investors, and policymakers in evaluating ESG performance.
In this this interview with TheCSRUniverse, Professor Anish Sugathan, Co-Chair, Arun Duggal Centre for ESG Research, IIMA sheds light on CESGR’s vision and work which includes active support for research initiatives, grants and consultancy projects. He explains the concept of “two-way materiality,” essential for businesses understanding the interconnectedness of ESG with financial performance and societal impacts. Highlighting the expanding scope of ESG regulations, Professor Sugathan underscores the growing significance of reliable ESG data and the role of institutions like CESGR in providing standardized metrics, and fostering an ecosystem where sustainable practices are incentivized. He touches upon the broad developments in the ESG space in India, their implications on businesses and also discusses how smaller organisations can adapt to these changes and enrich their propositions in the global market.
Read the full interview to understand the transformative power of ESG data and the pivotal role research-driven institutions play in shaping global corporate decisions and investments:
Q. Please take us through the overarching vision and focus areas of CESGR. Are there any highlights of the work done by the Centre so far that you would like to share with us?
A. CESGR aims to be a Centre of Excellence fostering sustainable and ethical organizations defining the future of responsible capitalism. It focuses on facilitating cutting-edge research and dialogue to improve the ESG performance of organizations while nurturing an ecosystem for stakeholder capitalism in India. The Centre, since its launch, has been engaged in knowledge dissemination and outreach programmes.
CESGR activities include supporting research projects aligned with the core mission and focus areas in the form of research grants, fellowships, and support for doctoral research.
The Centre also plans to engage with companies, investors, and other organizations on short-term consulting projects and advisory services that leverage the core strengths and scholarship developed at the Centre.
The Center, in addition to its core activities, engages in the creation and enhancement of educational and training materials for programs organized by both the Center itself and its affiliates.
Additionally, the Centre fosters dialogue and knowledge sharing among various public stakeholders to support evidence-based policy and standards for India's ESG ecosystem.
The Centre is currently engaged in several research projects, including "Role of Company Secretaries in shaping ESG Agenda in Indian Public Listed Companies: An Exploratory Study," "Governance and Mission Drift," and "ESG Performance and the likelihood of cross-border M&A deal completion." Additionally, student-led research initiatives undertaken by the Centre involve assessing the impact of the EU Carbon Border Adjustment Mechanism (CBAM) on Indian export-oriented businesses, developing a machine learning-based statistical index to predict the governance quality of Indian corporations, and building a statistical model to determine the firm-level carbon footprint using financial data. Furthermore, a team of students, supervised by the Centre, is actively working on crafting a response to SEBI’s consultation paper on ESG Rating providers for the securities market. The Centre also plans to conduct a survey on the, “State of ESG in India'', in the backdrop of the adoption of BRSR standards mandated by SEBI.
The Centre has joined hands with PwC in India for the establishment of PwC ESG Research Forum. A lecture series, involving seminars as well as webinars, on topics related to ESG, has also been started. The speakers invited for the lecture series are eminent practitioners in the domain. Our previous speakers include Mr. Brian Moynihan (CEO - Bank of America), Ms. Indira Nooyi (Former CEO, PepsiCo), Mr. Sanjeev Krishan (Chairperson, PwC in India), Dr. Aniket Shah (MD & Global ESG Head at Jefferies Group LLC), Mr. Ajay Tyagi (Former Chairperson, SEBI), Dr. Milind Kamble (Founder Chairman, Dalit Indian Chamber of Commerce and Industry-DICCI), Ms. Namita Vikas (Founder & Managing Director, auctusESG LLP), and Dr. Prasad Modak (MD Environmental Management Centre Pvt Ltd).
The Centre recently also collaborated with Mumbai First, as a knowledge partner for their Global Coastal Cities Summit, 2023.
Q. The recent collaboration between CESGR and Dun & Bradstreet India aims to address data gaps in ESG impact assessment. Could you elaborate on the specific data challenges you are looking to overcome?
A. We aim to harness our research capabilities to create a framework that aligns with the principle of two-way materiality. This initiative is designed to empower businesses, enabling them to stay ahead of the curve and contribute to broader economic growth. Additionally, this framework can serve as a valuable tool for investors, assisting them in rebalancing their investment portfolios and gaining a deeper understanding of the evaluation of the ESG ecosystem within the country.
This collaborative effort and its expected outcomes will play a pivotal role in addressing challenges related to ESG data. Often, inefficient and incomplete data hinder organizations from aligning with their ESG goals
Q. How do you envision the data product developed through this collaboration benefiting practitioners, investors, and policymakers in India's ESG landscape?
A. The product developed will facilitate practitioners, investors, and policymakers in creating custom ESG metrics to evaluate performance of Indian companies along the two-way materiality principle. The project's core principle is to develop two-way materiality metrics for Indian companies, aligning with the European Union's Corporate Sustainability Reporting Directive (CSRD). As India sets ambitious ESG goals and rolls out initiatives focused on sustainable development and clean energy, the collaboration between CESGR and D&B will contribute to meeting the enhanced ESG data requirements set by SEBI for the top 1,000 listed companies.
Q. Could you explain the concept of "two-way materiality" in the context of ESG and what it entails for businesses?
A. The concept of "two-way materiality" in the context of ESG (Environmental, Social, and Governance) is an important one that has gained traction in recent years, especially as businesses and investors recognize the interconnectedness of ESG factors with financial performance and broader societal impacts.
Traditionally, "materiality" in financial reporting referred to anything that could influence the economic decisions of users of financial statements. However, as the understanding and importance of ESG factors grew, it became evident that there are two dimensions to materiality — Inside-out materiality and Outside-In materiality. Two-way materiality in ESG provides a more comprehensive framework for businesses, especially in India, to understand their broader role and impact in society. As India continues its growth trajectory, businesses that embed these principles into their strategy are likely to be better positioned for sustainable success.
For businesses in India, understanding and addressing two-way materiality in the context of ESG has several implications like:
- India's regulators and stock exchanges have been enhancing ESG disclosure requirements. Recognizing both dimensions of materiality can help businesses remain compliant and avoid potential penalties.
- Indian consumers, investors, and other stakeholders are becoming more conscious of ESG issues. Addressing both inside-out and outside-in materiality can improve stakeholder relations and enhance a company's reputation.
- By identifying and addressing ESG risks from both perspectives, companies can better manage potential risks. For example, businesses dependent on natural resources may need to assess both the financial risks of resource scarcity and the societal implications of their resource consumption.
- While short-term financial performance is crucial, long-term success requires businesses to be in harmony with their environment and society. Addressing both facets of materiality ensures sustainable growth and longevity.
Q. What are the key principles and methodologies that CESGR plans to incorporate in its framework for assessing the impact of ESG factors on businesses and externalities caused by ESG activities?
A. We plan to create data products built on top of the comprehensive DnB unit level Indian corporate dataset to make custom metrics of both Inside-Out and Outside-In materiality.
Outside-In Materiality (Financial materiality) pertains to how ESG issues can impact a company's financial performance, either positively or negatively. For example, a company exposed to extreme weather events, due to climate change, might face financial penalties or a loss of market share due to negative consumer sentiment.
Inside-Out Materiality (Environmental and social externalities) refers to the impact a company's operations and practices can have on the external environment and society at large. Even if an ESG issue doesn't directly affect a company's short-term financial performance, its operation can have significant societal, environmental, or broader economic negative externalities. For instance, a company's extensive water usage might not hurt its immediate profits but could deplete local water resources, impacting communities and ecosystems.
Q. Could you elaborate on Dun & Bradstreet’s role in this partnership? How do you see their capabilities helping in achieving the objectives of the project?
A. D&B ESG Intelligence delivers data and analytics built from the Dun & Bradstreet Data Cloud and established sustainability standards to help companies quantify and assess the impact of their business partners' sustainability rankings to their companies' performance. This collaboration combines CESGR's research capabilities with D&B's extensive database to address data gaps and enable accurate ESG efficiency assessment. D&B is also contributing by providing meaningful ESG data with comprehensive coverage of sustainability performance data on over 73 million public and private businesses across more than 174 countries and territories. Dun & Bradstreet’s 360-degree ESG intelligence solution can improve the structuring of data, offers a clear view of all business relationships, and enables companies to align their ESG data to meet their ESG goals.
Q. SEBI has mandated ESG disclosures for the top 1000 listed companies in India. Although a significant step, do you think the scope of this mandate could be expanded further in the light of India’s ambitious ESG and sustainability goals?
A. As ESG regulations continue to evolve and become more stringent, the importance of establishing a robust data infrastructure in the country cannot be overstated. Reliable and accurate data serve as the bedrock for industries, especially those in nascent stages, striving to comply with the various ESG reporting frameworks that currently exist. In light of India's ambitious ESG and sustainability objectives, the conversation about expanding the scope of these regulations to encompass a broader spectrum of companies is certainly a pertinent one.
The increasing interest in ESG, sustainability and responsible investing can be attributed to investors acknowledging that elements such as climate change have tangible and lasting effects on the worth of their investments. As a greater number of investors embrace these approaches, companies will find it necessary to align with ESG criteria to attract investment. ESG has become a mainstay of conversation in corporate boardrooms and, more importantly, in the allocation of capital. The scope, I believe, in the light of recent mandates is going to further expand.
Q. What is your take on the current state of ESG awareness and adoption among Indian companies?
A. The state of ESG awareness and integration within Indian companies has seen notable growth. Several factors have contributed to this upward trajectory, including global sustainability trends, heightened investor expectations, and regulatory shifts.
The Securities and Exchange Board of India (SEBI) has played a significant role in advancing ESG awareness. In 2021, SEBI mandated that the top 1,000 listed companies disclose their business responsibility reports, encompassing ESG-related information. These regulatory initiatives are acting as catalysts, compelling companies to embrace ESG practices.
Indian companies are under increasing pressure from a diverse set of investors, both domestic and international, who emphasize ESG considerations in their investment decisions. Institutional investors and asset managers are increasingly integrating ESG factors when evaluating potential investments. In response, various ESG-focused financial products, such as ESG funds and sustainable bonds, have gained traction within India.
Many Indian companies have initiated sustainability programs and projects. These initiatives target diverse areas, such as reducing carbon footprints, advancing gender diversity, strengthening corporate governance, and enhancing supply chain sustainability.
Q. Do you think incorporating ESG principles is a feasible goal for smaller enterprises? What strategies can small and mid-sized companies employ to effectively incorporate ESG principles in their operations?
A. Incorporating ESG principles is indeed feasible for smaller enterprises. To effectively integrate ESG into their operations, small and mid-sized companies can start by identifying and prioritizing key ESG issues relevant to their business sector. Industry associations and regional commercial coalitions provide an excellent platform for knowledge sharing on ESG initiatives most beneficial to the respective sectors.
To start with, I see that compliance to ESG regulations, like the EU CBAM, will create a major cost competitiveness risk for export oriented companies in India. The emerging carbon markets in India, and increased access to international project funds at a lower cost of debt/capital, are the other two major drivers for SMEs to start actively planning an ESG strategy.
Q. What role do you foresee ESG data playing in shaping the future of corporate decision-making and investments on a global scale? What role will research driven institutions like CESGR play in the process?
A. ESG data will be instrumental in shaping corporate decision-making and investments globally. As stakeholders increasingly demand transparency and responsibility, companies will leverage ESG data to make informed decisions, manage risks, and identify growth opportunities. Investors will use this data to assess companies' long-term viability and resilience against systemic challenges like climate change, ensuring capital flows towards sustainable ventures.
Institutions like CESGR at IIMA aim to play a pivotal role in this transformation. By providing research, standardized metrics, and benchmarks, our goal is to aid businesses in navigating the ESG landscape, ensuring data accuracy and comparability. Their insights will also inform policy decisions, fostering an ecosystem where sustainable practices are incentivized, and ESG integration becomes the norm rather than the exception. We believe ESG data, bolstered by research-driven institutions, will be at the heart of future policies, regulations, corporate and investment strategies worldwide.
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