The concept of stakeholder capitalism, which emphasizes a company's responsibility to society beyond shareholder returns, is experiencing a resurgence. In its modern form, stakeholder capitalism is intricately linked to Environmental, Social, and Governance (ESG) issues. It calls for corporations to prioritize protecting the climate, ensuring workplace diversity, and safeguarding human rights. Corporates need ESG reporting because ESG reporting has become an essential strategy for companies to attract specialized investors seeking purpose-driven organizations committed to environmental sustainability.
The Importance of ESG Reporting
ESG reporting involves considering environmental, social, and governance factors alongside financial parameters when making investment decisions. Discerning investors now scrutinize non-financial aspects to identify climate risks and growth opportunities. In India, the Securities and Exchange Board (SEBI) introduced ESG reporting back in 2012, initially requiring the top 100 listed companies to file a Business Responsibility Report. Over time, the mandate expanded to cover the top 500 listed companies and, more recently, the top 1000 listed companies.
SEBI's Push for Transparency
SEBI has also introduced a more detailed sustainability reporting structure, known as the Business Responsibility and Sustainability Report (BRSR), focusing on quantifiable metrics. The BRSR aims to ensure transparency and accountability by requiring listed entities to disclose their performance against the nine principles of the 'National Guidelines on Responsible Business Conduct.' However, an important question arises: Do Indian companies truly implement what they promise in their annual reports and speeches on ESG practices?
Walking the Talk on ESG
The Reserve Bank of India conducted a study titled "Do Indian Companies Walk the Talk on ESG?" to address this question. Analyzing the annual reports of 50 large-cap companies from 2012-13, the study revealed that the average ESG scores of Indian companies have improved over the last decade, particularly in the environmental and social pillars. However, the governance pillar scores have fluctuated. Encouragingly, the study found a direct relationship between the increased usage of ESG-related words in communications and improvements in performance-based metrics.
The Link between ESG and Performance
The study also indicated that companies placing greater emphasis on ESG in their communications tend to be better ESG performers. Further analysis revealed that information technology (IT) companies consistently had the highest average ESG scores, while transport infrastructure companies scored the lowest. Additionally, firms with higher market capitalization tended to have higher ESG scores. This suggests that a company's growth and perceived valuation by investors are correlated with its performance on ESG parameters.
Benefits of ESG Reporting
ESG reporting offers several benefits for corporates. It allows companies to identify and manage risks effectively, build trust and transparency with investors and stakeholders, and attract sustainable investors who prioritize ESG factors. Demonstrating a strong commitment to ESG not only minimizes risks but also positions companies for growth and rewards from investors. Larger firms with greater resources can make investments that mitigate ESG-related risks and improve their overall ESG performance.
ESG reporting is a crucial aspect of responsible corporate practices, enabling companies to align their operations with environmental, social, and governance considerations. As evidenced by the study conducted by the Reserve Bank of India, Indian companies have shown improvement in their ESG scores over the past decade. By embracing ESG reporting, companies can manage risks, foster transparency, and attract sustainable investment, ultimately contributing to a more sustainable and responsible business landscape.
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