West indian people

ESG frameworks should serve the interests of people


As CoP-27 in Sharm el-Sheikh, Egypt puts the environment back in the global news, environmental, social and governance (ESG) proposals have become fashionable. This is a new formulation of an older triad of “People, Planet and Profits”, where people came before the other two concerns. Today, stakeholders, especially investors, need to reshape the narrative to identify better strategies for people’s advancement in a highly competitive world harassed by various debilitating factors.

Good and better jobs thanks to ESG: High unemployment rates and lack of decent jobs have plagued Indians for years. The nation needs an alternative, inclusive, resilient and sustainable economic growth model in which companies find a balance between three main organizational objectives: maximizing profit, minimizing environmental burden and improving well-being. workers. The actual implementation of a strong ESG proposition by organizations encouraged by investors would go a long way towards achieving it. The ESG movement has changed the way mainstream investors and portfolio managers view the risks associated with traditional business models and the potential for sustainable future value creation. Rigorous application of ESG analysis by investors can improve their risk-adjusted returns and increase investment value.

The ESG movement: The ESG acronym has swelled into a variety of meanings. Depending on who you ask, this could represent corporate responsibility efforts, a risk analysis framework, a dangerous placebo, or even an ideological agenda. Without standard definition and uniformity, ESG cannot fulfill its purpose. It is not a one-time or one-dimensional process. The three pillars should be considered together and given the same value for the evaluation criteria.

In India, ESG is a relatively new concept among companies and investors, and few investors explicitly consider a company’s ESG calculation when making investment decisions. However, this scenario is slowly changing. For ESG investing to thrive, stakeholders in India must first identify the material issues that hinder the country’s ESG growth potential.

Human capital formation as an “S” indicator: A recent stakeholder consultation by CUTS International as part of the Good and Better Jobs project, supported by the Ford Foundation, found that the “S” (social) element among the three investment strategies was essentially only a “tick the box” exercise. The social indicator has proven to be the most difficult to measure, integrate and analyze in ESG reporting. This is one of the reasons why investors and companies are focusing on climate change mitigation challenges as a predominant factor for investment decisions. However, social factors and good governance for the proper functioning of a business and the achievement of higher profitability are equally important.

First, we need to better understand the indicators that define “social”. Stakeholders and investors have described it in different ways: social issues, labor standards, human rights, pay equity, workplace diversity, consumer grievance redress, supply chain issues, data security, etc. A look at the formation of human capital and the well-being of political workers can also argue in favor of social reporting within the framework of ESG. Investors could be strong advocates of such a development, which is not the case today.

Human capital refers to the skill sets, knowledge, and experience that workers possess in an organization. This involves the training, retraining and development of the workforce (both white collar and blue collar) to prepare workers for future roles on a growth trajectory. Every business must have a strong relationship with its people for long-term growth.

One size does not fit all: ESG has become a growing body of unstructured data, but it needs a more focused approach to measuring its three pillars. The focus should be on “full consequence investment”. This means a search for profit compatible with environmental and societal considerations. Additionally, investors need to lead change through engagement rather than divestment, adopt more informed approaches to measurable factors, and welcome more inclusive stakeholder approaches.

Cost of integrating ESG practices: Although the benefits of integrating ESG practices are clear for companies, several risks and costs are involved. This is one of the many reasons why startups seem reluctant to participate in ESG reporting. The most obvious cost is the investment required to modify current operations. From implementing and upgrading new environmental policies to training costs, all of this has an associated cost that might not be feasible for cost-watching organizations or early-stage startups.

Apart from the issues highlighted above, several other reasons challenge the purpose and smooth integration of ESG in India. There is no reliable ranking system or standard reporting framework, the cost of integrating an ESG system is high, and a pool of skilled talent is often lacking.

Mitigating climate change risks is a major achievement for investors. But to achieve real growth, we need to focus on corporate governance standards and improving people’s quality of life.

This will help create a more inclusive and sustainable model of economic growth, where people, planet and profits coexist harmoniously as organizational goals.

Tanya Goyal of CUTS contributed to this article.

Pradeep S. Mehta is Secretary General, CUTS International

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