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The Triumphant Rise of ESG Compliances: Pioneering a Sustainable Future - MMJC
The Triumphant Rise of ESG Compliances: Pioneering a Sustainable Future
Introduction
In a world plagued by unprecedented environmental challenges and social inequalities, a powerful movement has emerged, reshaping the landscape of business and finance. Enter the era of Environmental, Social, and Governance (ESG) compliances – a holistic approach that transcends mere profit-seeking and heralds a transformative paradigm shift. Capturing the hearts and minds of corporations, investors, and consumers alike, ESG compliances have swiftly become the cornerstone of responsible and sustainable business practices.
From the boardrooms of multinational corporations to the bustling trading floors of financial markets, the influence of ESG compliances has permeated every level of the global economy. This article seeks to illuminate the driving forces behind this transformative shift, shedding light on the benefits and challenges associated with ESG integration.
Attention to ESG
In recent years, Environmental, Social, and Governance (ESG) investing has gained significant traction as investors increasingly prioritize sustainability and responsible business practices. These in India have gained significant momentum. The transformative power of ESG investing and its profound impact on companies and society is to be looked at in a very comprehensive and significant manner. ESG investing is on a rising spree and goes beyond traditional financial analysis by considering a company’s performance in environmental stewardship, social responsibility, and governance practices. Investors are increasingly recognizing that integrating ESG factors into investment decisions can enhance long-term value, mitigate risks, and align investments with their values and cautiously observing company’s approach towards the same.
ESG-focused investing acts as a catalyst for affirmative change by encouraging companies to adopt sustainable practices. As investors increasingly prioritize ESG factors, companies face growing pressure to align their operations with sustainability goals. This includes reducing carbon footprints, promoting diversity and inclusion, ensuring responsible supply chains, and strengthening corporate governance.
The rise of ESG investing has amplified the importance of ESG compliance in companies. To attract ESG-conscious investors, companies must prioritize sustainability, transparency, and ethical practices. This shift in investor preferences is compelling companies to adopt ESG compliance measures, such as enhanced reporting and disclosure, setting measurable ESG goals, and establishing robust sustainability strategies.
Number Crunching in ESG: Investor Driven
Globally there is around about $38 trillion invested in ESG funds, and this number is expected to reach $53 trillion in the coming years across the globe. Investors and more specifically ESG themed funds are directing their investments towards companies focusing on socially responsible investing and sustainable business growth. Investors are now moving towards sustainable investing which is also known as ethical investing or impact investing. They are building a portfolio of stocks wherein they aim to achieve financial returns in addition to promoting long-term ESG value.
Consequences of Non-Compliance
A recent high-profile example highlighting the impact of ESG compliance is one of a case where a popular name in investment banking industry took a decision to withdraw from a bond deal with an Indian conglomerate that is involved in various sectors. This move was in response to concerns regarding environmental impact. The withdrawal of ESG funds serves as a clear signal that ESG-focused investors expect companies to adhere to stringent ESG standards. It was observed that many ESG-focused funds in their portfolio held companies that are facing flak on social and environmental and governance parameters. In a survey conducted by ‘Economist’, it was discovered that world’s 20 biggest ESG funds had investments in fossil-fuel producers, oil producers, coalmining, gambling, alcohol, and tobacco. Presently, many ESG-focused funds are taking steps and in the process of modifying their investments. To aid the same, the introduction of unified, regulated, and independent standards for ESG rating and reporting requirements is the need of the hour.
Regulator’s Take
Securities market regulator has taken important steps to streamline areas of ESG Disclosures, ESG Ratings and ESG Investing. In March 2023 the Securities and Exchange Board of India (SEBI) came out with a holistic regulatory framework for ESG disclosures for India Inc, and rating agencies to facilitate a balanced approach for ESG. To enhance the reliability of ESG disclosures, the BRSR (Business Responsibility and Sustainability Report) Core has been established that contains a limited set of key performance indicators (KPIs), for which listed entities must obtain reasonable assurance. Initially, top 150 listed companies in terms of market capitalization are expected to disclose and obtain reasonable assurance on BRSR Core parameters. Eventually, the same will be extended to the top 1,000 listed entities. This along with ESG rating will help to enhance the reliability of ESG disclosures.
Expectations of investors and regulators from the company on ESG disclosures, transparency, and assurance are increasing exponentially. This compliance has put an additional responsibility on the Board. The Board shall through its committees oversee the overall ESG program focusing on associated risks, opportunities, and disclosures. Standardization of reporting framework will ensure correct disclosures in the public domain. The Directors especially independent directors must ensure that management has in place appropriate systems, controls, policies, and processes to mitigate risks and monitor regulatory changes.
ESG-focused investing is driving a paradigm shift in the business world, pushing companies to prioritize sustainable and responsible practices. The demand for ESG compliance from investors is reshaping corporate behaviour, promoting transparency, accountability, and positive societal impact. As more investors embrace ESG investing, companies will be incentivized to align with ESG principles, implement robust compliance measures, and work towards a sustainable future.
While recent cases demonstrate the increasing scrutiny of companies’ ESG performance, it also underscores the broader trend of investors using their financial influence to drive positive change. The ESG imperative is not just a passing trend; it is transforming the way businesses operate and reshaping the future of investing, ensuring a more sustainable and responsible global economy.
Conclusion
ESG is no longer just a buzzword; it has evolved into a critical lens through which organizations are evaluated, celebrated, and held accountable. These multifaceted criteria serve as the compass guiding decision-making processes towards long-term value creation, fostering resilience, and enhancing stakeholder trust. Gone are the days when profit margins were the sole measure of success; now, a broader set of considerations encompasses the environment, social impact, and corporate governance.
The article is written by Partner – Pradnesh Kamat and Published in Taxman
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