ESG – the key to a sustainable world?
Head of Corporate Sustainability at L&T, Pradeep Panigrahi, Ph. D. on ESG and how it impacts our future.
Nature has provided for mankind’s needs since time immemorial. However, the beginning of the Industrial Revolution in the 18th century proved to be an inflection point when machinery’s role in the production of goods and services took off. Since then, technology has taken giant strides, economic activity has accelerated, and the demand for natural resources has also grown exponentially.
Countries that embarked early on the industrialisation path – today’s developed world – took to rapid urbanisation and large-scale creation of physical infrastructure, which resulted in huge consumption of energy and natural resources. However, as the rest of the world started playing catch-up, the resultant explosion in economic activity started taking a toll on the planet. Not only did it create a severe drain on natural resources, it also led to deforestation, soil erosion, greenhouse gas (GHG) emission, and pollution, inflicting severe damage to bio-diversity. The cumulative result is what we now call the Climate Crisis. Over the last century, the temperature of the earth has risen by ~1 degree Celsius and we need to cap it at 1.5 degree Celsius by 2030 and 2 degree Celsius by 2050 as per the Paris Agreement (2015).
“We inherited this planet from our ancestors, but we cannot afford to borrow it from our children” – a quote I read on a mural years ago is a wonderful representation of something governments across the world have realised, and are planning corrective action. To arrest the adverse impact on nature and to fight climate change, the unanimous decision has been to adopt sustainable practices which include switching from fossil fuels to clean and renewable energy sources, bringing down levels of GHG emission, judicious use of water and other natural resources, arresting deforestation, planting more trees, cutting down on wastage and making use of recyclable materials, moving away from the use of plastic, etc. The Sustainable Development Goals (SDGs) of the United Nations, drafted in 2015 and adopted by 193 nations is a silver line and it is expected to create the right balance required for the planet.
The corporate sector accounts for the bulk of economic activity. Directly and indirectly, it is the largest corporations which exercise tremendous control over global assets, be it in terms of the number of people they employ, the consumers they serve (B2C or B2B), their supply chains, or the funds they mobilise. This concentration of economic power also allows them to have a disproportionate influence on policy and society. Quite naturally, governments are pursuing their SDG goals primarily through the corporate sector, especially by making the bigger players act fast. The evolution of the Environmental, Social, and Governance (ESG) framework is a step in that direction, whereby the corporate sector has to make specific disclosures, which include environment-related disclosures as well. Investors are aligning their ESG targets in their investment portfolio and therefore companies looking for investments need to adopt the same. ESG directs corporations to look beyond wealth maximisation and make it an integral part of their strategies and goals. More importantly, if these issues are not addressed now, this myopic focus on wealth and profit maximisation can inflict long-term pain on our planet. A recent study by Stockholm Resilience Centre gives a stark warning that we have crossed 6 out of 9 planetary boundaries, which means stability and resilience of Earth system is in danger.
According to a Bloomberg study, the global total of assets under management (AUM) in ESG-related funds stood at around USD 41 trillion as on end-2022 and is expected to surpass USD 50 trillion by 2025. However, while global investors and private equity investors are driving this push, so far, no multilateral funding agency for ESG initiatives has come up. The funds mobilised from emission trading and carbon taxes are also a drop in the ocean.
The onus is on each corporate to influence all channel partners, namely suppliers, vendors, ancillary companies, associates, etc. to embrace ESG so that they act more responsibly. However, in today’s world where the supply chain often involves multiple countries and jurisdictions, ensuring uniform adoption of ESG becomes a challenge. As of now, there is no uniform ESG yardstick and different countries play by different rulebooks. Even the accreditation methodology varies from one rating agency to another. The IFRS is trying to address this issue by creating an International Sustainability Standards Board (ISSB), which has already released two global standards, one on climate change and another on general sustainability. This is part of an ongoing global effort towards bringing sustainability reporting at par with financial reporting. The ESG framework not only aims to capture an organisation's business practices and performance on various sustainability and ethical parameters. It is now increasingly becoming a report card which a company can flash in its bid to attract investments. In fact, it is the large global institutional investors, who are pushing the corporate sector, through ESG, to adopt sustainable practices using a ‘carrot & stick’ approach – henceforth funds are likely to flow comparatively easily to those who deliver on their ESG commitments.
In India, the Business Responsibility & Sustainability Reporting (BRSR) framework of SEBI is driving the agenda. The BRSR is mandated from FY23 onwards for Top-1000 listed companies. While SEBI is driving hard to bring reform and to put India ahead of other countries in terms of ESG compliance, a huge amount of preparation is required to comply with the requirements. Early movers have a big advantage here.
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The recently concluded COP28 in Dubai has also given impetus to ESG with 3 clear decisions: transitioning away from all fossil fuels, economy-wide emission reduction targets and scaling up adaption finance. This is a big dimension of ESG and a huge number of challenges and opportunities lie ahead for businesses.
While the SDGs pursued by the countries came into being to fight the negatives of climate change and other socio-environmental issues, the ESG tool, which has gained currency to serve that purpose, is multi-dimensional and addresses much more than climate. It has to be kept in mind that E is much broader than climate. On top of that, there are the S and G factors which are continuously influenced by the changing geopolitical order. These make the process of aligning the interests of all stakeholders even more challenging. However, a beginning has been made, and in spite of all its shortcomings, ESG seems to be the only way forward towards building a sustainable world.
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Assistant Manager - Metal & Mining, Cement, Plastic Industry at Minimac Systems Pvt Ltd. (Oil Purification Equipments)
5moGreat post on the importance of ESG in addressing climate change. How can companies ensure uniform adoption of ESG across their global supply chains?
Excellent breakdown of ESG and its role in combating climate change! While challenges like lack of uniform standards exist, collaboration between corporations and governments is a powerful step toward a sustainable future.