Environmental, Social and Governance (ESG) - Need for an organization to attract various stakeholders

Environmental, social and governance (ESG) is a set of standards for how a company operates regarding the planet and its people. ESG is important because socially conscious investors now use ESG criteria to screen potential investments. Today there are many incidents like extreme weather changes, natural disasters and other Socio-economic and political changes have become a concern for businesses and large corporates.

Let us go through the ESG related Keypoints:

Concept of ESG

ESG approach provides a comprehensive and integrated approach on sustainability which emphasize not only Environmental impact but also Social and Governance in an organization. This framework helps Investors and stakeholders to assess in the manner organization manages Risk and any opportunities associated with environmental, social and governance.

The following are three essentials of ESG

1. Environmental
2. Social
3. Governance

Environmental part of ESG

It focuses on company’s commitment to the protection of natural resources and the environment itself.  This also checks what is the contribution of a company in climate change, energy consumption, Water pollution, Air pollution and overall environmental impact. Some of the examples are :

Material consumption and scrap, Energy efficiency, Carbon in the Air, Land and Soil , Nuclear radiation, Air Pollution, Noise Pollution, Hazardous gas, Waste generation and disposal, utilisation of natural resources, Deforestation etc.

It is the duty casted on the company to consider above environmental factors in their operations and strive to minimize their impact on the environment.

Social Part of ESG

It focuses on an organisation’s involvement in treating people and its impact on the society. It also evaluates the relationships a company has with various stakeholders like employees, suppliers, customers and various other stakeholders. Some of the key examples of Social factors are :

Poverty reduction, employee relations, Industrial relations, Community relations, employee relations and engagement, health and safety, human rights, poverty reduction, peach and security, Gender treatment and equality, customer and supplier satisfaction etc.

It is necessary that the company focusses on the social factors of ESG which helps companies to prioritize the well-being of the people and contribute to a more sustainable and equitable society.

Governance part of ESG

It focusses on compliance and accountability. Governance factory evaluates the internal control systems and internal check mechanisms and other audit practices practices in an organisation along with transparency, leadership, controls, and best practices available in an industry. Some of the key examples of governance factors are :

Compensation to Executives in an organization, Company leadership, board composition and diversity, corruption, Tax strategy, ESG Committee, Internal Audit, CSR Regulation- Policies and implementation of the same, Whistle-blower programs, Statutory compliance etc.

The company must focus on establishing transparent, ethical Board and sound internal practices which can contribute to the growth of the company in the long run for growth and sustainability.

ESG Reporting Process

Structured process must be followed to ensure that the ESG compliance is up to the mark and not just format filling activity. It should be effective and accurate. One can follow below flow while implementing ESG in an organization.

1. Identify the ESG issues in an organization and work out major criteria on which the regular assessment should be done;
2. Framework can be prepared based on the details gathered from the various functions;
3. Review of Key performance indicators worked out in point no.1. Take Stakeholders into consideration while making such reviews.
4. Training the team to understand the Why of the ESG and How to handle the setbacks in implementing and sustaining the ESG in an organization.
5. Check the flow of transactions under ESG framework through Internal Check and controls. It is advisable to do external audits for the reliability of the report. This will help to keep the Organisation accountable and investors can be attracted to the business as they are looking for ESG-compliant companies.

Challenges in implementing ESG Investments

1. Standardization of the processes and formats
2. Transparency towards key information of the company.
3. Greenwashing: Lack of standardization sometimes leads to Greenwashing. It means companies claim more about the products than what they are. It can damage the company as customers may lose their trust.
4. Regulations
5. High cost of implementing ESG and Time factor

Role of Audit Committee

1. Monitoring ESG Performance
2. Reporting of ESG Performance
3. Providing guidance on ESG Initiatives, Risk and opportunities
4. Ensuring Compliance of ESG in an organization.

Social Audits and Types of Social Audits

Today people are more aware of their rights and the information is readily available to them. They believe in transparency, accountability and ethical behaviour from organisations. This is the tool used by the government to evaluate the performance and ensure that the organization is meeting the needs of the citizens. Government can identify areas that need improvement, address concerns raised by citizens, and ensure that their policies and programs are sustainable in the long run.

Type of Social Audits

There are several types of Social Audits including

1. Economic Audit
2. Environmental Audit
3. Labour Audit
4. Social Risk Audit
5. Human Rights Audit
6. Contract Audit
7. Ethic Audit
8. Corporate Social Responsibilities

Who can perform Social audits in India

A person registered with ICAI or such other agency as may be specified by Board, who has qualified certification program conducted by National Institute of Securities market ( NISM ) and holds a valid certificate.

Eligibility Criteria

Any Individual or Entity of firm having a track record of minimum three years of conducting social impact assessment of a social enterprise indulged in any of the areas notified by SEBI under Regulation 292E of (SEBI Issue of Capital and Disclosure Requirements) Regulations 2022 (as per Gazette Notification of SEBI dated 25th July, 2022).

Average annual grants or expenditure of social enterprise for which impact assessment has been carried out for the last three financial years should be at least Rs.50 Lacs.

Suitable human resources in the field of social development having experience of usage of relevant methodology of social audit

Social Audit Standards in India

ICAI has been entrusted with the responsibility of being SRO for regulating the profession of Social Auditors. Sustainability Reporting Standard Board of ICAI has issues various Social Audit Standards.

Conclusion

It is now imperative that every organization should spread awareness within the organization as well as convey the intension to follow ESG compliances to the suppliers too. This will help an organization to govern the business by keeping Environmental, Social and Governance objective intact. This will also attract various investors to the company for joining hands as well as more talent will be attracted as they feel that they are working in a transparent company. It will also a proud to a company that they are investing in 17 Sustainable Developmental Goals ( SDGs) as set out in United Nation in 2015 with an aim to tackle global poverty, address issues with inequality and protect planet by 2030.

Disclaimer: Although due care is taken, it is prepared for general knowledge purposes and not for specific use. The readers are advised to take proper note of the same and advised to take specific advice before acting on the same. One should not act upon the information contained in this article without obtaining expert’s and professional advice. Further, no representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this article.