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As the world experiences one climate disaster after another, alongside the health and socio-economic fallouts of the pandemic and other adverse developments, the push for sustainability in all spheres of business activity is coming from various quarters - from consumers, social and climate activists, governments, and investor groups. This has led to ESG becoming an increasingly important paradigm for business and investing.

 ESG stands for Environmental Social and Governance. It refers to a set of linked principles for businesses to approach their activities from an angle that ensures that they factor in their social and environmental impact, and are accountable to a broad set of stakeholders across the length and breadth of their organizations, their supply chains, markets, communities, society at large, and the environment.

 ESG is gaining strong momentum as investors -- banks, financial institutions, private equity, venture capital and impact / social venture funds, factor in companies' activities and records on ESG, in their assessment of risks and returns. Companies' ESG disclosures and reports are becoming as central as their financial statements. ESG reporting is mostly done through a few widely accepted standards and protocols. It is still mostly voluntary from a regulatory point of view, but increasingly common due to investor and market pressures. Today, ESG funds -- portfolios of equities and/or bonds based on ESG factors, have assets worth $35 trillion, and they are outperforming many regular funds.

ESG and India

Like many global trends, ESG is making its presence felt in India.

However, India's tryst with ESG, or the idea of shepherding businesses towards social and environmental responsibility, is not new.

In fact, India's sustainability guidelines for business are about a decade old now, starting with the Business Responsibility Reports (BRR) of 2012 which required the top 100 listed companies by market capitalization to file such reports based on ESG principles. Since then it has kept evolving, as India has followed other nations in upping its commitment to meeting the UN's Sustainable Development Goals (UNSDGs).

The CSR law of 2013, by which 2% of net profits of companies over a certain financial threshold had to be dedicated towards corporate social responsibility expenditures was another major milestone. This law was modified in January 2021 in order to increase compliance and spends.

 In May 2021, possibly in response to growing momentum among international investors and markets, the Securities & Exchange Board of India (SEBI), replaced BRR with the Business Responsibility and Sustainability Report - BRSR.

BRSR is applicable to the top 1,000 listed entities by market capitalization. BRSR disclosure is on a voluntary basis for FY 2021-22; and on a mandatory basis from FY 2022–23. Key parameters reported under BRSR relate to the environment, waste management, employee/ worker welfare, inclusivity and benefits, occupational and workplace health & safety, consumer protections, product integrity, CSR, details of fines/ penalties paid in proceedings with regulators, etc. A detailed disclosure format has been developed to reflect a company's position on each of these parameters.

How CSR and ESG Connect

Since both CSR and BRSR are built around sustainability / ESG principles, it is important to see them in context.

BRSR takes a ESG based strategic view of a company, which factors in all aspects of its operations. It aims to link and sync these different activities to a sustainability ethos, in order to arrive at a measure of a company's actions and impact around sustainability. There is a focus on both internal actions and externalities in the BRSR approach.

With the CSR law, the Government of India set up a way of systemizing and promoting social and environmental welfare and development through business participation. While CSR does look at internal organizational factors around sustainability, the prime focus is on a company's contributions to sustainable development projects outside the organization, whose direct benefits may not accrue to the company itself.

CSR is part of a company's ESG -- as a defined programmatic component of an ESG plan or strategy, which must be implemented through dedicated resources, and included in its BRSR disclosures.

Why Strategic CSR and ESG Matter

 Both the CSR law and BRSR reporting take their guidance from various international sustainability standards and metrics. Therefore, a strategic view of both can go a long way in aligning with international ESG standards and disclosure requirements.

This is important in a number of ways.

 ESG investing is gathering momentum, as global ESG investors move deeper into emerging markets like India, looking for allied investments. Domestically too, there are nearly 10 exclusive ESG-focused funds in India now, of which six were launched in FY21.

At the same time as global ESG investing is rising, governments are setting tougher targets and measures around ESG not only for domestic businesses, but also on imports from other countries, thus setting into motion new global sustainability chains. The EU's new policy on having ESG measures around imports is an important indicator of this. The Singaporean Sovereign Wealth Fund's recent decision to not invest in some carbon-intensive projects is another.

 As global ESG investors look for aligned investment opportunities, and governments move towards a new trade and tariff regime around ESG, strategic ESG practices will become more vital for Indian companies seeking to attract investments from abroad or becoming part of the new global value chains.

What India Inc Needs To Do

 To capitalize on this, Indian businesses have to look to see how they can strategically grow their sustainability impact.

 Mere tokenism around CSR, or viewing it as corporate philanthropy will not suffice. Nor will mere ticking of boxes for ESG reporting purposes do the job. Evidence points to the fact that overwhelmingly, CSR resources are dedicated to easy, low hanging fruit. Very few projects are aligned with companies' operations and actual impact areas, since it is far easier to become CSR compliant by simply donating money to a national fund or creating a program around social issues with high visibility to generate some positive reactions from consumers or media. On ESG too, indicators are not encouraging. Even with regulatory oversight a great many Indian businesses fall afoul of one or more principles, incluidng those that require CSR or ESG disclosure. More often than not, their intent is to meet the metrics rather than make real progress on ESG. There is a need to use CSR and ESG for real value creation in the economy through a much wider base of businesses.

This is where ESG investing comes in. The goal of ESG investing is to make resources flow towards those ventures or enterprises which can have a positive impact on society or the environment while also generating profits for innovators, businesses and investors.

For this, the ESG disclosure reports from the top thousand companies will not be sufficient for generating the desired impact or returns. ESG investors' diligence - both domestic and international -- must be broader. They must look at start ups and mid-size businesses that are working to address ESG issues.

Also, typically, 'E' tends to be given more weightage in ESG perspectives. Thus, investors often look for climate change impact actions in their search for value. But in emerging economies like India, the 'S' may need more weightage, because of the socio-economic deficits that exist. So companies, regardless of their market cap, working on education inclusion or health needs in India, or bringing technology to the masses, must be able to attract ESG investments. Consider the case of a start-up that is working to address the education, tech and energy deficits of rural students simultaneously, by delivering education through a solar-powered device and projection system and through mobiles charged on solar power banks. Or take a fintech company that is using a combination of bricks and clicks to bring financial services to rural masses. Consider both the need and potential for scale.

Cases like this indicate that along with regulatory oversight, the unlocking and scaling of ESG value in startups and medium enterprises dispersed across the economy by investors, is essential for unleashing the power of sustainable development. Only then can ESG generate maximum impact.