World is seeking ESG leaders; is India on track?

Blog ImageThrough the Union Budget the government has shown the intent to accelerate the pace for ESG compliance at varied levels. The scrapping policy for vehicles 15 years or older, emphasis on the solar energy sector, and penal provision on corporates delaying payments to EPF are welcome moves to start with. Importantly, the finance minister touched upon the Human Capital Development under the six pillars of the Union Budget that set the tone for establishing the growing significance of Environmental, Social and Governance (ESG) parameters for corporate India. With the passage of time, clearer directives are essential to ensure India meets its true potential. But is this enough?

Let us rewind to the 80s. Back then, global supply chains were rapidly reorienting towards low-cost manufacturing destinations. China, the economic powerhouse of this age, rode the crest of change by aggressively opening up its economy through growth-oriented reforms. By the end of the 80s, the value added by China’s manufacturing sector was 34% of their GDP as compared to India’s 16% of GDP. While India has come a long way since then, red tape and poor infrastructure continue to pull us back from fulfilling our high aspirations.

Now, with ESG gaining importance among global investors, India has a golden chance to make the most of this opportunity. This strategic reorientation presents India with another chance to enter the global manufacturing supply chain. The world has changed; Indian corporations shouldn’t be caught napping. Unlike in the 80s, supply chain choices will be driven as much by ESG factors as cost factors. A look at OECD (Organisation for Economic Co-operation and Development) member countries establishes the increasing emphasis on sustainability. Even Bangladesh, perceived as a least developed country, safeguard minimum labour safety standards following the Dhaka Garment Factory Fire in 2012. Punitive actions are taken against defaulters.

At a corporate level, companies worldwide are improving ESG practices in literally everything they do. Global corporations have already made ESG issues an important factor driving executive compensation. For instance, Apple recently announced that it has decided to implement ESG “Bonus Modifier” for its leadership team executives on the basis of how they operate within the company’s ESG values. The 2020 Semler Brossy ESG + Incentive report (published by Harvard Law School) states that nearly 62% of Fortune 200 companies include some kind of ESG measures in executive compensation that can be assessed on sustainability metrics such as diversity & inclusion, gender pay, carbon footprint, energy efficiency, consumer satisfaction and waste reduction.

Time is ripe for India to cash in on the geopolitical shifts and contribute to global supply chains. India could miss the bus unless it promotes socially sustainable business models. The recently enacted Performance Linked Incentive (PLI) Scheme can be used to promote ESG. Like investments and productions target even ESG metrics can be defined and assessed. Environmental compliance can be assessed via targets that include renewable energy use, water efficiency and toxic materials reduction initiatives, GHG emissions reduction strategy and supply chain environmental audit. Social obligations, on the other hand, can be gauged via data points such as emissions and health and safety targets. Finally, assessment of governance may include, risk management committee compliance and Key Management Personnel compensation strategy inclusive of ESG. Incentives for meeting these targets can be in the form of tax benefits, interest subvention, subsidised land, and priority in government contracts.

For specialised targets such as gender equality and supply chain environmental audits, more specific incentive schemes can be devised. These can be in the form of Gender Diversity-Bonus and Equality Bonuses (in the form of tax incentives) for promoting gender sensitivity in business. The EU’s ‘Green Financing’ offering based on information provided under the ‘Environmental Information Disclosure System and Emission Trading Scheme’ can also be emulated to incentivise businesses, which proactively audit supply chains for sustainability. Further, punitive tax structures along with the reversal of incentives can be used for businesses failing to comply with set standards.

India needs a comprehensive, independent, and unbiased ESG assessment framework for efficient allocation of resources and rewards high performers to tower over its peers. Only if India can have a sustained, proactive engagement with strong ESG practices that it can successfully capture a permanent capital in the new world order.
– Sankar Chakraborti- CEO, Acuité Ratings Group and Chairman, ESG Risk Assessments & Insights

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