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Climate Governance by Integrating ESG
By- Institute of Directors | Authored by- Lt. Gen. Surinder Nath, PVSM AVSM (Retd.)
Jul 02, 2023
Environmental considerations play a key role in policy and decision making at all levels and at all parts of the globe. Sustainable business growth has now added new dimensions of Inclusiveness, Ethics, Human Rights and Safety Concerns of the stakeholders. Climate change has brought in a new dimension of variability and uncertainty. Serious concern for ESG – Environmental, Social and Governance issues are now at centre stage as business is now acting as a fourth pillar of sustainable global growth. The concept of responsible investing started gaining attraction around 1980's. ESG issues were first mentioned in the 2006 United Nation's Principles for Responsible Investment (PRI) Report. Following are the UN principles for responsible investing for institutional investors:
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.
These principles are important as they form the basis for the fiduciary outlook of investors. Now, institutional investors invest proprietary money as well as public money in companies for returns. They have to play the role of stewards and adhere to stewardship codes- some prescribed, some best practices. One of the stewardship principles is responsible investing with ESG goals, thus aligning the society's interests and the investor's interests.
Recently, investors have been increasingly factoring in the environmental and social footprints of companies in their investment decisions. This stems from a growing awareness that sustainability issues can put the performance of companies at risk. Climate risk is investment risk and climate transition presents a historic investment opportunity. Investors are increasingly disposed against management and board directors when companies are not making sufficient progress on sustainability related disclosures and the business practices and plans underlying them. The institutions see a clear link between ESG performance and good financial performance, and they want companies to improve their engagement and reporting on these topics. The increased focus on ESG performance of companies is reflected in the increase in total assets and inflows in sustainable funds. The covid pandemic has also accelerated the shift to sustainable investing.
Regulators around the world are increasingly demanding ESG disclosures on a mandatory basis.
While India has had mandatory ESG reporting since 2012, it was needed to be reviewed, especially in view of global developments. There is a multiplicity of sustainability reporting standards and frameworks, such as the SASB (Sustainability Accounting Standards Board), TCFD (Task Force on Climate Related Financial Disclosures), CDSB (Climate Disclosure Standards Board), GRI (Global Reporting Initiative) and IIRC (International Integrated Reporting Council) etc; and the lack of a single, comprehensive framework made comparison on ESG issues challenging for investors and other stakeholders.
Two main views of ESG exist, and to some extent they work in directionally opposite ways. One view of ESG is that it reflects the impact a company has on the welfare of its stakeholders, such as employees, suppliers, customers, local community, and the environment. A competing view is that ESG measures the impact that societal and environmental factors have on the company, and that these factors are financially material.
ESG ratings are gaining acceptance. During the past two years, there has been a proliferation in ESG rating providers and consequently ESG ratings around the world. There is an increasing move globally by many financial and securities market regulators to intervene into this uncertainty. SEBI's initiative is one of the first globally and concentrates on many issues relating to ESG ratings, including rating providers. SEBI, in its consultation paper, stated that different jurisdictions have different NDC's (Nationally Determined Contributions) and have adopted varied transition parts and have diverse operational realities, sustainability risks, opportunities and impact may vary across geographies. SEBI was also of view that there is a need for ESG providers to factor in the local/ domestic context while assigning ESG ratings.
Climate Change is the new frontier. Recent climate change activities have brought forth a number of complex and nonlinear changes in the earth's system. The severity and frequency of climate related disasters are accelerating, as is the risk of catastrophic disruptions. The IPCC 6 Assessment Report (AR6), published recently, highlights the role of businesses in mitigating or adapting to climate change issues.
At the COP 26 summit in Glasgow, India had made the following commitments towards the climate change goals;
a) Raising non- fossil fuel-based energy capacity to 500 GW.
b) Lowering total projected carbon emissions by one billion tons.
c) Meeting 50% of the country's energy needs through renewable sources
d) Reducing the carbon intensity of the economy to sub 45% level.
Commitment to achieve Net-Zero emissions by 2070 was made subsequently.
For the world to have a chance of limiting global warming to within 1.5 degrees Celsius (2.7 degrees Fahrenheit) of preindustrial levels, cities need to act fast - and financing would need to be boosted significantly. Aggressive climate action could bring city emissions to net-zero by 2050. But failing to act could instead see urban emissions double in that time. Companies have to hold hands with cities in going down this path by building green buildings, reducing plastic and electronic waste, using renewable energy like solar panels, adopting initiatives like Work from Home etc. (the last mentioned can, in fact, take care of both E and S factors in ESG).
This special issue of Director Today is focusing on ESG and Climate Change has contributions from well-known experts from different parts of the globe. I have presented an overview and the Way Forward to work effectively with these two action agendas.
Back to HomeAuthor
Lt. Gen. Surinder Nath, PVSM AVSM (Retd.)
President, Institute of Directors
former Chairman, UPSC
former Vice Chief of Army Staff and
former Independent Director, L&T Ltd.
He took over as the President of Institute of Directors with effect from 02 December, 2022
Owned by: Institute of Directors, India
Disclaimer: The opinions expressed in the articles/ stories are the personal opinions of the author. IOD/ Editor is not responsible for the accuracy, completeness, suitability, or validity of any information in those articles. The information, facts or opinions expressed in the articles/ speeches do not reflect the views of IOD/ Editor and IOD/ Editor does not assume any responsibility or liability for the same.
