What does it take to make a business future-ready? Cloud, digital, artificial intelligence, machine learning, reskilling—these are some of the buzzwords being bandied about in corporate boardrooms. Now, add ESG to the list. And it isn’t just because markets regulator, the Securities and Exchange Board of India (Sebi), has mandated the top 1,000 companies by market capitalisation to disclose their ESG activities under its Business   Responsibility   and   Sustainability   Reporting   (BRSR) framework.

“ESG plays a pivotal role in ensuring the long-term sustainability of businesses as it encompasses all the non-financial aspects that either directly or indirectly impact the bottom line of the business,” explains Rathin Kukreja, Practice Leader & Associate Director-Consulting at CRISIL Market Intelligence and Analytics. While companies have been dealing with ESG (environmental, social and governance) for a while, it is only in recent years that organisations have cottoned on to the fact that these principles are good for business. Kukreja says ESG-centric organisations will be able to build resilient, viable and impactful businesses in future years. ESG integration, he adds, can have multiple benefits, including better operational efficiency, tapping unexplored opportunities, sustainable profitability, better risk management and strong governance—all of which help increase shareholder value. 

Such frameworks also provide long-term sustainability by comprehensively safeguarding profits, people and the planet, say experts. “Assimilating environmental, social and governance factors and measuring the impact created can help in future-proofing of enterprises with respect to the opportunities and threats that cannot often be measured,” says Prosenjit Ghosh, Director at ESGRisk.ai, and Group Chief Business Officer of Acuité Ratings & Research. Also, it was once common for businesses to outsource environmentally or socially risky operations and distance themselves from those risks. But now, traceability and transparency of supply chains and product procurement practices are being demanded by stakeholders. A recent Sebi consultation paper has also proposed ESG disclosures for the supply chain. Companies will be pressured to take greater ownership of extended product responsibility as regulations grow.

Transparency with respect to [ESG] disclosures can help attract capital and gain the trust of investors

Updeep Singh Chatrath
President & CEO
Sutlej Textiles and Industries

Green Moves

The focus on the ‘environmental’ part of ESG leads businesses towards responsible consumption of resources such as energy and water, as well as the use of environment-friendly technologies. For instance, Tata Chemicals—using data as an enabler—has implemented the connected plant concept at its 80-year-old Mithapur plant in Gujarat. “Analytics, the Internet of Things (IoT), artificial intelligence, digital twins and so on help us look at our emissions, making sure that we are far more sustainable, improving our operating efficiency and lowering our impact on the environment,” says Richard Lobo, Head-Innovation, R&D, Business Excellence and Chief Ethics Counsellor at Tata Chemicals. The Mithapur plant has been water-neutral for many years. 

Environmental metrics also play a key role in reducing operational costs. Energy and emissions tracking can help a company identify areas to implement energy efficiency improvements and incorporate renewable energy measures in their operations, say experts. Over the long run, this leads to significant savings in terms of energy and costs. Plus, there are other benefits. “Transparency with respect to the disclosures can help attract capital and gain the trust of investors. In addition, banks are increasingly conducting ESG due diligence before extending finance to companies. Thus better ‘E’ performance may also lead to lower interest rates and other avenues of green financing from financial institutions,” says Updeep Singh Chatrath, President and CEO of textiles major Sutlej Textiles and Industries Ltd. Sutlej, a part of the KK Birla Group, has implemented backward integration by establishing its own process to get raw materials required to produce ‘green’ fibre instead of relying on external suppliers. It has incorporated energy efficiency measures that reduce carbon emissions and leads to overall cost reduction. In addition, it utilises post-consumer recycled polyester in drapery and upholstery, leading to lower consumption of water and energy. 

A company’s performance on environmental metrics demonstrates its commitment to green practices and sustainability and has the potential to enhance its brand reputation among customers as well.

The Social Aspect

Let’s come to the second aspect of ESG. Social factors are pivotal in determining a company’s long-term sustainability and ability to face challenges. It includes factors such as human rights, fair labour practices, living conditions, health, safety, diversity, work-life balance, community engagement, philanthropy, and much more. “Any lapse in these factors has a potentially adverse impact on productivity, branding and overall culture of any organisation. For example, penalty on account of flouting labour laws, injury to employees due to risky working conditions, etc.,” says Satish Ramchandani, Co-founder and Chief Business Officer of Updapt, an ESG tech firm. An example that can be followed, he says, is Tata Steel’s safety and health practices, which includes six long-term safety priorities backed by a robust management system framework such as incident and accident management, improving health conditions, safety process management, etc., and a sound safety governance structure.

Satish Ramchandani
Co-founder and Chief Business Officer
Updapt

Research also indicates that companies with robust diversity, equity, and inclusion (DEI) policies and attractive employee benefits tend to outperform their peers financially. This can be attributed to the positive impact of fostering a diverse and inclusive workforce. It also involves actively working to improve DEI within the firm, as well as promoting ethical behaviour and social responsibility in all operations.

Acknowledging this, Procter & Gamble (P&G) is creating an inclusive work environment. “Our inclusive and progressive policies translate our position into significant action. For instance, ShareTheCare, that encourages equal roles in parenthood by offering eight weeks of paternity leave to our people. Further, all our company-offered health and financial benefits are made available to partners of LGBTQ+ employees,” says L.V. Vaidyanathan, MD & CEO of P&G India.

Strong governance practices help companies identify and manage risks more effectively

Viral Thakker
Partner and Sustainability Leader
Deloitte India

But this social lens shouldn’t just be limited to employees. Companies have to think about the betterment of society as well. Take for instance, Crompton Greaves Consumer Electricals Ltd’s (CGCEL) flagship Project Udaan, that has a two-fold approach to upskilling its existing plumbing workforce, says Pravin Saraf, Vice President of Manufacturing & Quality at CGCEL. The first aspect is that the training enables them to get access to better livelihood opportunities. The second is that it helps the industry with a more skilled workforce, meeting new-age product lines and growing expectations from customers.  

Working towards the upliftment of the weaker sections of society is also considered a positive, say experts. For instance, mining conglomerate Vedanta is focussed on the communities it operates in. “If the societies near our operating regions are prosperous and empowered, it ascertains a safer working and operational environment, with a vast talent pool to incorporate in our businesses,” says Priya Agarwal Hebbar, Chairperson of Hindustan Zinc Ltd and Non-Executive Director of Vedanta Ltd. Its flagship social impact programme is called Nand Ghar, where the endeavour is to transform the Aanganwadi (daycare and crèche) ecosystem in rural India. Currently, the company operates more than 4,000 Nand Ghars, and it aims to build another 25,000 of them to provide care and learning to more than 70 million children and skilling opportunities to 20 million women all over India. “In addition, we offer upskilling programmes for women in areas such as mining rescue, forklifting and driving to ensure larger participation from our local communities in the business,” says Agarwal Hebbar.

The added benefit is that by promoting local suppliers and vendors, companies can directly reduce costs and improve their financial performance. For example, Sutlej has been working on procuring from local suppliers, which has led to lower costs for the company.

Governance Matters

The next aspect of ESG is ‘governance’. Viral Thakker, Partner and Sustainability Leader at Deloitte India, says strong governance practices help companies to identify and manage risks more effectively. This is because they help to ensure that companies have a clear understanding of their risks, a plan to mitigate them, and the resources and capabilities to respond to them. For instance, Godrej Industries has an internal ESG committee that it reports to annually with its performance, says Ramnath Vaidyanathan, Associate Vice President and Head of Environmental Sustainability at Godrej Industries Ltd and Associate Companies. The committee also informs and guides the company’s long-term ESG strategy.

Strong governance includes a set of rules and guidelines that determine how a company is operated and managed. The main objective is to make sure that the company acts in a transparent and accountable manner and that its leadership acts in the best interest of stakeholders. If followed diligently, it leads to a more resilient organisation that can better anticipate and mitigate potential, including sustainability-related risks such as environmental incidents, social unrest, or regulatory non-compliance, say experts. 

ESG plays a pivotal role in ensuring the long-term sustainability of businesses as it encompasses all the non-financial aspects, which either directly or indirectly impact the bottom line.

Rathin Kukreja
Practice Leader & Associate Director Consulting
CRISIL Market Intelligence and Analytics

Challenges Ahead

But while ESG is good for business, not all Indian companies are ready. Deloitte’s latest India’s ESG preparedness survey reveals that only 27 per cent of the businesses that were part of the study are well-prepared to meet ESG requirements, while only 15 per cent of organisations’ suppliers are ESG-ready. What’s surprising is that less than half (49 per cent) of the respondents are aware of India’s ESG reporting mechanisms and regulations. While commitment to ESG principles is high, there is a significant gap in preparedness and action, with the majority believing that there is a need to simplify ESG compliance or improve ESG reporting procedures.

There are multiple challenges that prevent ESG from being adopted by all. The primary one faced by organisations in India is the lack of understanding of its benefits. This issue is even more pertinent in the case of small- and mid-sized businesses. According to experts, most organisations in India perceive ESG practices as a cost rather than an opportunity. ESG considerations often require overhauling business processes that may have been functioning successfully for a long period. “Many organisations consider it expensive and complex as it may involve the integration of new technology, adherence to stringent government regulations, the transformation of major operations, employee resistance to change, etc., while some find it difficult to identify the relevant performance indicators they need to monitor,” says Praveen Mysore, Technical Director at Dassault Systèmes India. Even if organisations are successful in identifying and monitoring the performance indicators the first time, continuing to do so is often considered a tedious process requiring dedicated resources and coordination across teams to keep track of real-time data and meet reporting requirements. Due to this, ESG-related investments take a back seat.

Even though regulatory guidelines force companies into ESG compliance, the lack of universal benchmarking or standardisation in selecting an approach for the assessment of a company is proving to be another hindrance. Also, there are no regulations that demand that all the companies disclose ESG factors, say experts. Regulatory bodies are trying to overcome these challenges by creating standard guidelines for companies to adhere to and make their own ESG strategies.

Plus, there is an absence of skilled ESG professionals capable of working within the confines of sustainability from an operational perspective, which is further complicated by rapidly evolving frameworks and regulations. As ESG practices and alignment with sustainability creates higher value for firms, it also emerges as an opportunity to create value, profit, and raise capital. And if not already, businesses should begin analysing, strategising, and disclosing their ESG impact today to mitigate risk, build resilience, and future-proof themselves.