If you've ever had questions about ESG, this is the only ESG guide you need to answer all of them.
Titan is a leading consumer goods company in India, producing a wide range of products including jewellery, watches and eyewear. Titan, in an attempt to be sustainable, has launched watches that have cactus or coconut leather over the commonly seen animal-derived ones.
The brand is also known to be responsive and accountable to public criticism by taking down ads that offend communities. Such positive practices of Titan have made it a household name and a trusted brand for jewellery in India.
In the current market, consumers and investors are more educated about their wants and needs, likes and dislikes, and relationships based on trust are becoming important. These stakeholders want results and processes that make space for priorities beyond profit for shareholders.
The demand for analysts and strategists who can make decisions driven by the need to resolve environmental, social and governance (ESG) issues has never been higher. Now more than ever, the answers these professionals come up with can change how we perceive and solve everyday business problems.
Why ESG?
A transparent and accountable business and strategy can be a clinching factor in stakeholders choosing to work with your company. Companies with a space for inclusivity, equality, privacy, sustainability, and responsible economics foster better relationships with their stakeholders.
One of the earliest ideas of ESG emerged in 1994 when John Elkington introduced the idea of the Triple Bottom Line or TBL. In economics, the TBL states that instead of businesses focussing on a single bottom line, i.e. profit, they should also add planet and people to the equation. A company should be run keeping in mind higher profits, the well-being of the customers and people and also the planet.
Fast forward 16 years, in the year of the pandemic 2020, the annual meeting of the World Economic Forum. In this particular meeting, some of the world’s largest companies came together to discuss a set of guidelines to measure ESG performance, calling them ‘Stakeholder Capitalism Metrics’. These metrics take into account the needs of society and stakeholders in the long term and lay lesser emphasis than was historically placed, on profit-driving dividends, sending shockwaves to the profit-driven corporate world.
The foundations of ESG lie in responsibility and accountability and have three pillars: Environment, Social and Governance.
The Environmental pillar focuses on the company’s response to climate change, carbon footprint, deforestation, land use, and waste management. This pillar helps companies better inform and understand their impacts on the environment, both direct and indirect. One of the more significant ways of gauging this impact is by using carbon emission scopes, 1, 2 and 3.
Scope 1 focuses on direct carbon emissions, and considers emissions from fuels, heating sources, refrigeration, air conditioning units, factory fumes and during production.
Scope 2 emissions are created by the production of energy that the company buys. Electricity for most organisations makes up a big portion of scope 2 emissions.
Scope 3 emissions on the other hand are all emissions that are not owned by the company. These are a result of either the customer’s use of the product or produced by suppliers in the process of making products that the company uses. Scope 3 emissions, therefore, are the toughest to deal with, since they involve every stakeholder in the value chain.
The second pillar is Social - it stresses the importance of inclusion, health and safety of employees, human rights, and product safety. It highlights the importance of fair human resource treatment and establishing relationships between all stakeholders involved. Past examples have also shown that greater customer and employee satisfaction is key to a company’s growth. Not only do these aspects create long-term relationships but also facilitate a better brand image. ESG-compliant companies have in recent times shown skyrocketing growth because of the relationships they’ve fostered with their stakeholders. An example is the cosmetics company, The Body Shop. The brand has shown immense growth in India with its sustainably made cruelty-free products and is set to double its growth in India by 2025.
The third and final pillar is Governance. It focuses on a company’s bureaucratic structure, executive pay, tax transparency, corruption and board diversity and evaluates the effect of the internal control system on decision-making. In the current scenario, governance blunders are less likely to go unnoticed. In the past, instances of gender discrimination and pay parity were easily overlooked but in the present, such reports can severely damage a company and its stock and image. While under-the-table practices previously were a part and parcel of the corporate structure, engaging in such activities now, puts companies at greater legal and management risks.
ESG is an intersection between corporate social responsibility and corporate sustainability. While the former focuses on positive societal impacts and is community and consumer-interest-driven, the latter is more concerned with value addition. The whole concept of corporate sustainability relies on creating the maximum amount of profit for the investors and shareholders. It is the conflict between philanthropy and philosophy, and ESG falls somewhere between the two.
Is whistleblowing leading to better ESG regulations?
ESG regulation is a set of requirements for an organisation to publicly disclose information about its performance in the environmental, social, or governance sectors. Current regulations vary by industry and geography. In India, the top 1000 listed companies now need to publicly disclose their ESG practices. These companies need to create reports outlining their efforts on resource usage, scope-wise emissions profiles, impact on biodiversity, gender and social diversity in the workplace, data privacy, employee training, and anti-corruption and bribery policies among others. Noncompliance with ESG guidelines mandates a fine or suspension of activities for a fixed period. Not only does this affect the organisation’s profits and smooth running but can also deeply hamper its credibility in the market.
Some of the most significant transformations in the regulatory space are an outcome of ESG whistleblowing. Whistleblowing has helped bring into light cases like fraud and corruption and identify the alleys organisations create to get away with unethical practices. One of the most prominent examples of this is the origin of India’s Whistleblower Policy 2014, which was formed as a result of the public asking for better whistleblower protection laws following the Satyam Scandal of 2009. This scandal was uncovered by a whistleblower who found that the CEO of Satyam Computer Services, B Ramalinga Raju embezzled ₹7,136 crores from the company.
Although the Satyam Scandal wasn't the first case of fraud and embezzlement in the long list of white-collar crimes, it served as a wake-up call to authorities on the importance of whistleblowers.
The concept is rooted in the idea of good faith and reports malpractices in any sphere.
Whistleblowing in the context of ESG (Environmental, Social, and Governance) is the act of alerting authorities to any unethical or unlawful behaviour involving ESG aspects within a business or organisation. Whistleblowing is the act of alerting authorities or the public to information about harmful, corrupt, or illegal acts taking place within an organisation.
ESG-related whistleblowing can assist in identifying and resolving problems like environmental violations, hazardous working conditions, violations of human rights, corruption, and other unethical or illegal behaviour that could be harmful to the environment or society. Whistleblowers can be a vital part of encouraging greater accountability and transparency in business processes as well as holding corporations responsible for their deeds. Whistleblowers may occasionally experience hostility from their employers for disclosing ESG-related misbehaviour but specific protection provisions like the Sarbanes-Oxley Act, in the US protect whistleblowers.
India, being an emerging market, faces its own sets of challenges in the whistleblowing space. Most organisations in India neither have the infrastructure nor the awareness to establish mechanisms for ESG disclosures. The fear of retaliation, lack of awareness and support, and a culture of transparency and accountability also make it difficult for employees to disclose their company’s wrongdoings. But this doesn’t make whistleblowing a completely novel concept as more and more instances of complaints in listed companies are coming up. For example, in 2021, Sun Pharma, one of India’s largest drug-making companies paid a settlement of INR 56 lakhs, under the allegations of fund diversion. Another such case is of ICICI Bank, which also paid a settlement of INR 28.4 lakhs to an employee for making him work under officials he had filed complaints against.
With newer mandates to protect the environment, the well-being of involved communities, and human rights, being ESG non-compliant is tougher than ever. The regulations on anti-slavery, data privacy, cybersecurity, ESG disclosures, pay parity and whistleblower protections are stronger than they have been and place greater emphasis on transparency and accountability.
Environmental Regulations
The Inflation Reduction Act of 2022 in the United States of America, made the largest investment in energy security and climate change. It introduced penalties for producers of excessive methane gas and incentives for electric vehicles. In the UK, the regulations are both domestic and EU-derived. The Climate Change Act 2008 is the UK’s primary climate change law and calls for a 100% decrease in greenhouse gas emissions in 2050 compared to 1990.
Environment protection in India is a part of the Constitution’s Directive Principles and Fundamental Duties. The government of India has set down multiple environmental and conservation laws to safeguard its biodiversity. The Wildlife Act of 1972, The Water Act of 1974, The Air Act of 1981, and The Environment Protection Act of 1986 are some of the major acts that impose fines and penalties on those who endanger the environment, safety and health. The penalties can be prison sentences or fines and in cases of serious offences, both.
(Also Read: A Brief History: Project Tiger)
When analysing the effect of their activities on the environment, organisations should do their due diligence by factoring in elements such as the sector they belong to and the ministries that operate in those sectors. Different ministries have different environmental regulations that organisations must adhere to. Although the pollution control board and MOEFCC are the primary environmental regulatory bodies, other laws and factors also affect these regulations.
Social Regulations The only ESG guide you need
In the US, The Dodd-Frank Consumer Protection Act protects consumers from exploitative financial practices and promotes accountability and transparency in the capital markets. In the UK, The Modern Slavery Act 2015, protects people from modern slavery and human trafficking. In India, the latest attempt at data privacy has been made through the introduction of The Digital Personal Data Protection Bill in Parliament. This bill seeks to set up The Data Protection Board of India, an independent body to enact data privacy-based laws.
Governance Regulations
In the US, board diversity disclosures are mandatory, while both in the UK and the US, CEO pay ratio and pay equity disclosures are compulsory. With the advent of social media in India, and a considerable number of youth, diversity and inclusion debates have come to the forefront. In India, diversity goes beyond gender. Diversity in India exists in religions, languages, communities and heritage, making representation even more important in corporate leadership roles. Under the Companies Act, 2013, it is mandatory to have at least one woman director on the board of every listed or unlisted public company, of companies that cross a certain threshold of turnover. During 2013- 2022, India made significant contributions in increasing women's representation on boards from 6% in 2013 to 18% in 2022, which is a result of the 2013 corporate mandate. While the growth is substantial, there is still massive room for improvement.
Stakeholders and ESG
Having clear communication and proactively disclosing ESG practices is a rite of passage for trust-building with important stakeholders. Establishing a strong ESG program not only helps build a strong brand image but also positively impacts revenue and investments. In the last few years, many investors have become wary of practices like greenwashing and placed higher equity on transparency and accountability. Taking a deeper look at the important stakeholders and how they use ESG disclosures to come to conclusions is necessary to identify your business’s target audience.
Investors are one of the biggest users of the tool which is the ESG report. They use such reports to gauge a company's ethical and sustainable commitments. Interest by investors in ESG has soared in the last few years. As ESG becomes a bigger part of a company’s risk management framework, a company that does not operate in good faith is not only looking at a fall in valuation but also bad PR. Investors are generally risk averse and for companies that pose a threat of loss in valuation, getting investors on board is tough. Kingfisher Airlines in India is a leading example of how PR and bad faith can lead to a company’s downfall. When news of the company defaulting on payments broke, its employees went on strike, and it failed to pay its taxes, the company was forced to shut down in 2012, with its shares becoming worthless.
Customers have been shown to purchase from brands whose values align with their own. With the advent of the sustainability movement, more consumers have become aware of their impact on the environment and the people engaged in creating the products they buy. Customers are also aware of practices like greenwashing, where companies mislead consumers about how their product is environmentally friendly and can see through the superficial and PR-related sustainability efforts of organisations.
Younger employees now want to work for ethical companies, where issues of gender, race and pay parity are prioritised. Not only do better ESG practices attract a bigger talent pool due to social credibility but also increase employee motivation, satisfaction and chances of staying long-term.
Working in ESG
In the workplace, ESG can have different meanings to different parts of the company. For HR, ESG plays an important role in image and posing the company as a desirable organisation. For risk and compliance executives, minimising ESG risks and complying with the regulations in place is essential. While for the CEO and CFO, maximising profits and business advantage is key.
Market research has shown that better ESG practices attract customers and have better access to resources due to better community and government relations. Another way ESG drives profits is by cutting energy consumption costs and optimised resource use.
Here are some of the higher level and managerial job roles and responsibilities that deal with ESG:
CEO: For the CEO, the focus is a business edge. These professionals seek to answer questions about ROI on investment in ESG while optimising costs.
CFO: The Chief Executive Officer focuses on the economic effects of ESG reporting and costs. Both the CEO and CFO, work closely on maximising profit and results.
CMO: The Chief Marketing Officer primarily works on building a positive brand image to drive sales and valuation. Their responsibility is to find answers to questions of ESG’s demand and growth.
HR: The HR department is responsible for all things on the employee side. Focussing on diversity, inclusion, equality and community building, they leverage the ESG pillars to become ideal workplaces for employees.
Jobs in ESG:
Sustainability Manager
The responsibility of a sustainability manager in an organisation is to direct and carry out projects and programmes related to sustainability. To make sure that the company's sustainability objectives are accomplished, they collaborate closely with all departments.
Similar jobs: Environmental Manager, CSR Manager, Socially Responsible Investment (SRI) Analyst
ESG Analyst
To find potential hazards and possibilities for improvement, ESG analysts examine and investigate a company's environmental, social, and governance practices. To make suggestions to investors and other stakeholders, they also examine ESG data and trends.
Similar jobs: Sustainable Investing Analyst, CSR Analyst, Environmental, Health, and Safety (EHS) Analyst, Impact Investment Analyst, ESG Data Analyst, Sustainability Reporting Analyst, ESG Consultant
Climate Risk Analyst
Climate risk analysts evaluate the potential effects of climate change on the operations, supply chain, and financial performance of a firm. They assist businesses in creating plans to reduce these risks and adjust to the changing environment.
Similar jobs: Environmental Risk Analyst, Sustainability Risk Analyst, Climate Change Specialist, Environmental Compliance Specialist, Energy Risk Analyst, Sustainability Strategy Manager, Climate Adaptation Specialist, Sustainable Finance Specialist, and Carbon Market Analyst
Social Impact Manager
Social impact managers create and carry out social programmes that deal with topics including community development, human rights, and diversity and inclusion. To advance social responsibility and sustainable development, they collaborate with stakeholders both inside and outside the business.
Similar jobs: Sustainability Manager, Community Relations Manager, Nonprofit Program Manager, Social Entrepreneur, Philanthropy Manager, Government Affairs Manager, Impact Assessment Manager, Social Innovation Manager,
Governance Analyst
Governance analysts assess the governance processes of a corporation, including the make-up of the board, CEO pay, and shareholder rights. They offer suggestions to enhance accountability and transparency across board decisions.
Similar jobs: Corporate Governance Manager, Compliance Analyst, Risk Management Analyst, Legal Analyst, Policy Analyst, Ethics and Compliance Officer, Sustainability Analyst, Investor Relations Manager, Internal Auditor, and Board Liaison
Other specialised job roles in ESG
Environmental Scientists
Green Building Consultant
Waste Reduction Manager
Sustainable Agriculture Specialist
Climate Change Analyst
Renewable Energy Analyst
Environmental Engineer
Environmental Health and Safety Specialist
Environmental Planner
Soil and Plant Scientist
Environmental Educator
Who can work in ESG?
There’s a checklist to get through if you’re interested in pursuing a career in ESG. The following are prerequisites, but are not an exhaustive list:
critical thinking, the entire point of becoming an ESG professional is coming up with novel ideas and unique solutions to more important questions. Analytical skills are rare and prized possessions.
business experience. Since most of the time is spent answering questions that make the business more investable and sustainable, business acumen coupled with a sense of responsibility towards the environment is a sought-after combination.
multidisciplinary lens. ESG professionals spend a long time trying to balance profit and sustainability. They need to sit back and approach the problem from a wider perspective of financial analysis and ecological duties.
Passion, therefore, plays a part in the work of an ESG expert. If you have an annoying voice in your head that tells you constantly to make the world a better place, you might be a good fit for this job. In recent times, this job has blown up not because the younger generation is hungry for money but because this generation knows the importance of sustainability-driven business decisions. The need for ESG professionals stems from the need to come face to face-with the implications of our corporate choices. If you care about any of the E, S, or G concerns of this job, you’ve come one step closer to making more conscious choices and that’s a big part of any business.
Is ESG another way of greenwashing and is it necessary?
Does ESG create alleyways for businesses to get away with greenwashing? The use of defined measurements and verification techniques helps make a more transparent and accurate assessment of a company's sustainability policies, even if it is sometimes possible for businesses to utilise ESG as a greenwashing tactic. Additionally, the greater scrutiny and regulation of ESG reporting brought on by the growing popularity of ESG investing has reduced the possibility of greenwashing. Although it does not stop the sceptic from equating risk management to greenwashing. To thoroughly evaluate a company's sustainability and ethical policies though, investors and customers should exercise caution and look past the company’s claims.
While ESG may not be strictly necessary its importance is certainly skyrocketing. With investors being more aware of the consequences of good and bad ESG practices, ESG’s importance is undeniable. This means that companies that do not consider ESG factors may miss out on investment opportunities and could face reputational damage if they are seen as not being responsible corporate citizens.
(Also Read: The Red Flags of Green Investment)
References
Sun Pharma Settles Whistleblower Complaint Case, BQPrime Law, 11 February 2021
What Is a Whistleblower? Protections, Law, Importance, and Example, Investopedia, August 23, 2022
Whistleblower complaints against ICICI Bank: The story so far, LiveMint, 27 Jun 2018
Triple Bottom Line, Investopedia, September 09, 2022
Greenwashing And ESG: What You Need To Know, Forbes, August 25 2022
When firms play the ESG card for greenwashing, The Hindu Businessline, February 22, 2023
Satyam scam is all about murky real estate and the original whistleblower is metro-man Sreedharan, Firstpost, April 10 2015
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