ESG compliance is not just limited to meeting regulatory requirements, but has a larger impact on the brand’s image, market value, customer satisfaction, talent pool, and supply chain partners
A company’s sustainable business strategy is a reflection of its board. Today, the value of a business is not just based on its sales and financial performance, but also involves the impact it has created in the society in which it operates. Stakeholders today are increasingly looking to associate with organisations that have adopted ESG principles in their business practices. Organisations have also realised that ESG factors directly impact long-term profitability.
Globally, companies are increasingly reporting ESG metrics, driven by a regulatory push and investor needs. Banks and financial institutions are proactively taking steps to factor in ESG risk in their credit appraisal process to make suitable adjustments to loan tenures. India has also taken early strides in this direction, with SEBI making Business Responsibility and Sustainability Reporting mandatory for the top 1,000 listed companies for the financial year 2022-23. This is likely to help India in its efforts towards creating a standard framework for ESG-related financial disclosures. Many corporations are gearing up to support the country’s target to achieve net-zero emissions status by 2070 and cut carbon emissions by 1 billion tonnes by 2030.
Unfortunately, the constituency that has been slow to make this change is the corporate boards. Directors entrusted with their company’s future are often holding the enterprise back with an outdated emphasis on short-term value maximisation. Integrating ESG within the organisation calls for a long-term vision that is supported by research, data-backed metrics, and continuous evaluation. An effective ESG strategy should be designed to accomplish each company’s individual goals.
Merging purpose with strategy
While it is easy for a company to want to become more environmentally and socially conscious, it is important to set an achievable framework to achieve these goals. Aligning purpose with strategy provides leadership with the impetus to imbibe ESG principles into the business processes. Once your purpose is clearly defined, the next step is to undertake a sustainability materiality assessment. This entails engaging with the stakeholders to identify the most relevant and pressing ESG topics for the business. After identifying and prioritising ESG topics, the organisation needs to establish ESG metrics and develop a long-term strategic ESG vision. Setting this goal will help in creating a framework for better decision-making and evaluation, ensuring that the organisation creates the most meaningful impact.
Outcome based approach
The onus of ESG compliance lies on the top leadership. Leadership should ensure that the company’s mission is embraced by everyone in the organisation- from the CEO to the workers on the shop floor. To ensure ESG performance is prioritised, businesses need to hold leadership responsible. In a recent discussion paper by the RBI on climate risk and sustainable finance, the regulator recommended that banks put in place a mechanism at the board level for overseeing and scaling up initiatives relating to climate risk and sustainability. It recommended that banks consider including key performance indicators on climate risk, sustainability, and ESG as a part of the performance evaluation of their top management. RBI’s approach towards developing a regulatory framework will be a key enabler for the banking industry to develop appropriate risk management structures.
Organisations should reward and penalise management based on both financial and non-financial metrics. This will help to prioritise long-term goals and resist pressure from other stakeholders who care only about short-term returns. When choosing the right metrics to tie to rewards, performance should be evaluated both in terms of the company’s ESG activities and the external impact of its products and services. One of the ways organisations can create a balanced reward system is by having variable pay for board members based on their performance on non-financial metrics such as ESG performance.
Transparency and reporting
For effective ESG compliance, an organisation needs to set standards for reporting and measurement. Measuring the impact of your ESG efforts is important, as it helps you take corrective action and reward employees based on their performance. Organisations need to maintain ESG data around processes, supply chains, customers, and value chains. Such data will not only help in compliance with regulations, but also in communicating with investors, customers, and society at large. Instead of manually modifying data, which is prone to data mishaps, boards may consider investing in technological solutions to improve information integrity. Instead, using ESG reporting software could help brands easily report their ESG targets to various stakeholders.
Businesses are often sensitive about sharing such data with key stakeholders. However, the times demand that we be transparent and follow a clear disclosure policy for sharing such data. Further, brands should demonstrate their purpose by demonstrating how they are achieving the targets in both quantitative and qualitative terms. For example: Quantitatively, brands can report their financial results alongside reports on their ESG performance, establishing a correlation between the two. On the other hand, they can communicate a consistent narrative around their work in the areas of environmental sustainability, social welfare, and governance to explain the qualitative aspect.
As corporate boards seek to stay abreast of their companies’ ESG risks and exposure, they should also plan on how it could impact operations and strategies. Boards should hold regular discussions with their ESG team, operations, management, and legal team to be informed of the companies’ evolving risk appetites.
Additionally, diversity in the boardroom is also considered a key to effective corporate governance. A diverse board could invite fresh perspectives, push for robust debates, understand customers better, and also help attract the right talent.
ESG compliance is not just limited to meeting regulatory requirements, but has a larger impact on the brand’s image, market value, customer satisfaction, talent pool, and supply chain partners. Unlocking the true potential of ESG requires brands to treat it not like an initiative or compliance, but as a way of doing business in the new world.
Article by Prabhat Gupta, Managing Director & Head – Legal and Compliance, DBS Bank India
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