OPINION: As ESG disclosures turn mainstream, here’s a quick overview of challenges and approaches for Indian businesses
Jul 11, 2022, 16:39 IST
Non-financial disclosure requirements have leapfrogged globally in the past decade, holding companies accountable for identifying Environment, Social, and Governance (ESG) responsibilities and their transparent incorporation in annual disclosures. The concept of materiality has helped businesses identify material products and/or services with bearings on their long-term sustainable growth in a globally competitive business environment.
To begin with, companies are still using Sustainability and ESG interchangeably, indicating a deficiency in a reasonable understanding of ESG. Now let’s look at the challenges assuming a top-down approach:
Businesses with a presence across geographies need to comply with requirements at a different scale. With the rise of reporting requirements in the US SEC Climate Disclosure Regulations and the EU Directive on Sustainability Reporting, multi-national companies have additional liabilities for inaccurate disclosures. A large number of reporting frameworks, each with unique considerations around Key Performance Indicators (KPIs), associated data and metrics, further adds to the challenge.
ESG ranking and rating have become the third elephant in the room beyond credit rating agencies and proxy advisors. The issue gets even more complex with multiple ranking and rating agencies and their approach and methodology towards rating. A business will have to consider its peers and expectations of its value chain partners and investors, who may have different preferences resulting in a multiplication of efforts and investment.
The next or rather the most crucial element is “data”; integration of ongoing, real-time data is key to meeting disclosure commitments, ensuring societal and environmental relevance and potentially contributing towards tangible long-term financial returns.
Incorporating the cost of carbon into investment decisions is believed to be an enabler for business growth, expansion, divestment, and innovation. However, when businesses consider doing this, the variety of approaches to ascertain it presents a challenge in itself. Businesses with hard-to-abate environmental footprint and cross-border transaction opportunities, such as iron & steel, cement, maritime etc., are struggling to develop a deeper understanding of such issues.
Information on life cycle assessment (LCA) and recycling for companies with a longer upstream supply chain is a challenge of different magnitude and scale. This gets further complicated when the supply chain is spread across multiple geographies and the final product is used in a different country, making recall and recycling financially prohibitive. Stakeholders may further call out such issues when the final usage of the product happens in geographies with less strict regulations.
In India, certain listed companies transitioned from Global Reporting Initiative (GRI) based reporting to an Integrated Report (IR) based on International Integrated Reporting Council (IIRC) guidelines in 2017. Thereby, they integrated both financial and non-financial capitals and started following a regimented approach of one single disclosure for the consumption of its stakeholders. The BRSR requirements have further added an additional document getting appended to the IR. In contrast, in the previous regime, if a company was producing a GRI-based “Sustainability Report”, it could have avoided Business Responsibility Report (BRR).
Every problem has a solution or, at the very minimum, an approach towards a solution. Learning from better practices and pathways followed by peers is a great way to accelerate your journey. Set up transformational goals and targets, which can be achieved without losing your focus on the business. It is very similar to listening to an airline in-flight security brief, “the nearest exit door can be behind you”.
The next growth opportunity for your business can come from a well-identified risk, which can become an opportunity. A clear understanding of what you are disclosing, including your own interpretation, will make it easy. Citing the example of having an employee union as a parameter in ESG ranking, an organisation may not have an employee union, but if it represents that “we understand and value the collective bargaining power of our employees”, the message is clear to all the stakeholders.
To summarise, ESG is the new quality standard, and it will take efforts from all quarters to streamline the expectations of practically all stakeholders, right from regulators, investors, employees, society, etc. The final expectation from the stakeholders is to develop a deeper understanding of the linkage between business and environmental science and its interdependence on society.
Furthermore, prioritisation of right efforts is needed that may reflect in the ESG goals and targets set by companies resulting in ownership and accountability. Though ESG is a subject open to “learning-by-doing” approach, the opportunity window is limited. These challenges will incubate leaders across sectors and geographies to transition their businesses into a new sustainable paradigm.
Inderjeet Singh is Partner, Financial Advisory at the Deloitte Touche Tohmatsu India, LLP
This column is part of a year-long (2022-23) campaign on the theme “Only One Earth: Sustaining People, Planet and Prosperity” by Business Insider India’s Sustainability Insider.
Disclaimer: The opinions expressed by the author/interviewee do not necessarily reflect the views of Business Insider India. The article has been partly edited for length and clarity.
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ESG disclosures have matured over time, and the seriousness on various disclosure elements is aptly visible from the actions taken by businesses. These actions range from voluntary decisions to disclose to being part of regulatory expectations, i.e., through Business Responsibility and Sustainability Report (“BRSR”). In all fairness, the learning curve is getting better by the day, yet businesses are grappling with multiple challenges for their ESG disclosures.Challenges around ESG
To begin with, companies are still using Sustainability and ESG interchangeably, indicating a deficiency in a reasonable understanding of ESG. Now let’s look at the challenges assuming a top-down approach:
Businesses with a presence across geographies need to comply with requirements at a different scale. With the rise of reporting requirements in the US SEC Climate Disclosure Regulations and the EU Directive on Sustainability Reporting, multi-national companies have additional liabilities for inaccurate disclosures. A large number of reporting frameworks, each with unique considerations around Key Performance Indicators (KPIs), associated data and metrics, further adds to the challenge.
ESG ranking and rating have become the third elephant in the room beyond credit rating agencies and proxy advisors. The issue gets even more complex with multiple ranking and rating agencies and their approach and methodology towards rating. A business will have to consider its peers and expectations of its value chain partners and investors, who may have different preferences resulting in a multiplication of efforts and investment.
Understanding the data complexities
The next or rather the most crucial element is “data”; integration of ongoing, real-time data is key to meeting disclosure commitments, ensuring societal and environmental relevance and potentially contributing towards tangible long-term financial returns.
Incorporating the cost of carbon into investment decisions is believed to be an enabler for business growth, expansion, divestment, and innovation. However, when businesses consider doing this, the variety of approaches to ascertain it presents a challenge in itself. Businesses with hard-to-abate environmental footprint and cross-border transaction opportunities, such as iron & steel, cement, maritime etc., are struggling to develop a deeper understanding of such issues.
Information on life cycle assessment (LCA) and recycling for companies with a longer upstream supply chain is a challenge of different magnitude and scale. This gets further complicated when the supply chain is spread across multiple geographies and the final product is used in a different country, making recall and recycling financially prohibitive. Stakeholders may further call out such issues when the final usage of the product happens in geographies with less strict regulations.
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In India, certain listed companies transitioned from Global Reporting Initiative (GRI) based reporting to an Integrated Report (IR) based on International Integrated Reporting Council (IIRC) guidelines in 2017. Thereby, they integrated both financial and non-financial capitals and started following a regimented approach of one single disclosure for the consumption of its stakeholders. The BRSR requirements have further added an additional document getting appended to the IR. In contrast, in the previous regime, if a company was producing a GRI-based “Sustainability Report”, it could have avoided Business Responsibility Report (BRR).
Learning from peers
Every problem has a solution or, at the very minimum, an approach towards a solution. Learning from better practices and pathways followed by peers is a great way to accelerate your journey. Set up transformational goals and targets, which can be achieved without losing your focus on the business. It is very similar to listening to an airline in-flight security brief, “the nearest exit door can be behind you”.
The next growth opportunity for your business can come from a well-identified risk, which can become an opportunity. A clear understanding of what you are disclosing, including your own interpretation, will make it easy. Citing the example of having an employee union as a parameter in ESG ranking, an organisation may not have an employee union, but if it represents that “we understand and value the collective bargaining power of our employees”, the message is clear to all the stakeholders.
To summarise, ESG is the new quality standard, and it will take efforts from all quarters to streamline the expectations of practically all stakeholders, right from regulators, investors, employees, society, etc. The final expectation from the stakeholders is to develop a deeper understanding of the linkage between business and environmental science and its interdependence on society.
Furthermore, prioritisation of right efforts is needed that may reflect in the ESG goals and targets set by companies resulting in ownership and accountability. Though ESG is a subject open to “learning-by-doing” approach, the opportunity window is limited. These challenges will incubate leaders across sectors and geographies to transition their businesses into a new sustainable paradigm.
Inderjeet Singh is Partner, Financial Advisory at the Deloitte Touche Tohmatsu India, LLP
This column is part of a year-long (2022-23) campaign on the theme “Only One Earth: Sustaining People, Planet and Prosperity” by Business Insider India’s Sustainability Insider.
Disclaimer: The opinions expressed by the author/interviewee do not necessarily reflect the views of Business Insider India. The article has been partly edited for length and clarity.
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