Environmental, Social, and Governance (ESG) practices are becoming crucial for businesses today, but they come with their challenges. Even with the introduction of the Business Responsibility and Sustainability Report (BRSR) by SEBI, Indian companies face considerable hurdles in meeting ESG regulations. In this interview with Jaya Vaidhyanathan, CEO, BCT Digital, we delve into the complexities and emerging trends in ESG, particularly within the Indian context.
While touching upon the challenges of regulatory compliance, Ms. Vaidhyanathan also discusses the growing investments in ESG technology, the reality behind ESG-focused investments, and the evolving role of government policies in driving sustainability.
Excerpts from the interview:
Q. Regulatory compliance, even as per the findings of the Chartis Market Review, continues to be a big challenge in ESG reporting. Could you map out the reasons why even after the introduction of BRSR it is still a challenge for companies?
A. Indian companies are increasingly adopting global best practices in corporate governance, and the introduction of the BRSR by SEBIs for the top 1,000 listed companies by market capitalisation is a significant step forward. This aligns with international standards and aims to enhance transparency and accountability in ESG reporting. However, there are several challenges that remain. While the BRSR is mandatory for the top 1,000 companies, smaller companies may struggle with its adoption due to limited resources and expertise. The diverse and complex nature of ESG metrics makes it challenging for companies to gather data and standardize their reporting process. The introduction of BRSR adds to the compliance burden for companies, particularly challenging for smaller companies with limited capabilities. While SEBI’s introduction of BRSR is a step in the right direction, challenges in broader adoption, data quality, and compliance continue to make regulatory compliance in ESG reporting a complex issue for Indian companies.
Q. Your survey suggests that 72% of the 77 companies you surveyed are planning to invest heavily on ESG technology. Can you throw some light on how diversified the investments are expected to be given that most ESG investments are centered around climate technology?
A. The survey revealed most firms review their ESG strategies quarterly, spending an average of $250,000 to $500,000 annually, with North American and European institutions more likely to exceed $500,000. The next year’s investments are expected to focus on ESG data and scoring products, governance, risk management and compliance (GRC) solutions, and regulatory compliance and reporting tools.
Q. ESG including ESG funds is a buzzword in the finance world these days. Do you think this buzz reflects in actual investments?
A. ESG considerations have moved beyond being a buzzword. Due to mounting investor demand, regulatory obligations, and data relating ESG elements to long-term financial performance, they are becoming more and more integrated into mainstream financial decision-making. Many institutional and retail investors are increasingly allocating funds to ESG-compliant investments. ESG assets under management have surged, reflecting a shift towards sustainability-focused investment strategies. ESG investing is becoming a mainstay in the financial world and has seen substantial growth globally, with ESG funds attracting trillions of dollars in assets under management.
Q. There is some apprehension in the market that an ESG-focused agenda may require a company to compromise on profits. How true is this?
A. It's a common concern that an ESG-focused agenda might adversely impact profits. However, evidence suggests otherwise. An increasing number of organisations today consider ESG technology essential for financial success. They recognise the positive correlation between ESG adherence and financial and operational performance. In fact, our survey shows that firms are planning to increase their spending on climate risk solutions, with most allocating between $250,000 and $500,000 annually.
In addition, ESG practices can not only unlock new revenue streams by attracting customers but also secure capital at a lower cost from socially conscious investors. There's also a growing emphasis on green finance, with financial institutions expected to support environmentally sustainable projects like renewable energy initiatives and energy efficiency improvements. While implementing ESG compliance can be perceived as costly, firms are turning to technology to automate risk detection, mitigation, and compliance. This investment in technology not only improves operational efficiency but also further reduces costs and strengthens risk management efforts.
To summarise, ESG integration doesn't just protect profits; it enhances the overall financial performance of businesses by reducing cost of capital, operational costs, improving efficiency and unlocking new revenue streams.
Q. Could you elaborate on the role of government policies when it comes to driving ESG investments?
A. Many organisations today identify regulatory support as crucial for ESG adoption. Policies like tax incentives, subsidies, and standardised reporting will continue to encourage them to prioritise sustainability. These measures will also create a level playing field, steering innovation and investment in ESG solutions.
Regulatory efforts also play a crucial role in encouraging investors to integrate ESG factors into their decision-making processes. Such policies promote investments that align with the broader sustainability goals of the region or the industry. Furthermore, they help prevent greenwashing by ensuring that sustainability reporting is done in a credible manner, underpinned by facts and metrics, thereby fostering trust and accountability in the market.
Q. A major focus of ESG investment reporting and utilisation continues to be on the Environment while the Social factors still feature the least, especially, in India. How do you see this changing going forward?
A. While environmental factors continue to dominate India’s ESG investment dialogue, there is a notable shift towards enhancing the focus on social factors. The industry increasingly recognizes that social sustainability, encompassing labour rights, employee welfare, community impact, and equitable access to resources, plays a crucial role in the long-term success of organizations. Emerging regulatory frameworks are being drawn up to attract greater attention and investment in social aspects. Concurrently, customer awareness of the social dimensions of ESG has reached peak levels, prompting regulators and businesses to improve the reporting and tracking of social metrics. Strengthening initiatives related to diversity, equity, and inclusion (DE&I), employee engagement, fair pay, access to the social security schemes for employees, workplace health and safety, community interactions, responsible sourcing, and ethical behaviour are some of the ways businesses can reimagine and enhance the social aspects of ESG.
Q. What are the emerging ESG trends in India? How do you envision creating an ESG framework that remains relevant amidst evolving economic and technological landscapes?
A. Emerging ESG trends in India reflect a holistic approach to sustainability, with significant emphasis on renewable energy projects, waste management, and water conservation. Social issues, such as labour rights and community development, are gaining prominence due to increased awareness and regulatory pressures.
On the regulatory and reporting front, adopting flexible, data-driven approaches is essential to maintain the relevance and accuracy of ESG frameworks. Leveraging AI, analytics, and big data for ESG assessments, along with efforts towards the standardization of ESG reporting and heightened stakeholder involvement, are crucial to enhancing the impact and transparency of ESG initiatives.
Q. Scope 3 emissions constitute a large part of GHG emissions. However, many ESG practitioners are still struggling with reporting their Scope 3 emissions. Tracking them tends to be more complicated as it requires a company to analyse its supply chain activities. What do you think is the way forward?
A. Scope 3 emissions constitute a significant portion of GHG emissions, and the data around the same can be particularly challenging due to their complexity and the need to analyse the entire supply chain. To effectively manage Scope 3 emissions, companies need to implement comprehensive measurement systems, leverage industry standards, continuous engagement with suppliers/partners, track metrics to establish specific targets. However, building robust data collection systems, advanced AI-led analytics such as heatmaps by categories, close collaboration with stakeholders and promoting transparency throughout the value chain can help break down this complexity to a certain extent. These measures can enable organizations’ efforts towards precise data collection and real-time monitoring and reporting of Scope 3 emissions.
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