American lender Bank of America estimates that the firms on the S&P 500 list have lost close to $600 billion in market capitalisation in the last seven years to such “ESG controversies”— from Rio Tinto’s insensitive handling of a touchy race issue to German payments firm Wirecard’s blatant accounting fraud to British retailer Boohoo’s underplaying of labour abuses at its suppliers factories.
Funds strictly following the ESG mandate globally already account for a corpus of over $2 trillion, according to fund research firm Lipper. Those signing up for some form of ESG mandate, not necessarily fiduciary in nature, tot up assets in excess of $80 trillion. A recent report by Moody’s Investor Service informs that even during times of a raging pandemic, global sustainable bond issuances touched $100 billion for the quarter ending June, almost a third more than the same period last year.
The marquee American association of top businesses, the Business Roundtable, that counts Apple, Amazon, Coca-Cola and JP Morgan Chase as members, last year redefined the purpose of a corporation to “…benefit all stakeholders — customers, employees, suppliers, communities and shareholders.” Note that it junked its over four decades-old focus based on shareholder primacy, essentially one that maintained that a corporation exists primarily to serve shareholders. The club of signatories to the United Nations Principles of Responsible Investment, a body that promotes incorporation of ESG into investment decision-making, is growing and is over 2,300 strong now.
The head of the world’s biggest money manager, BlackRock’s Larry Fink, in his last annual letter red-flagged what global capital will increasingly seek — a vote against management and boards “when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” Last year itself, BlackRock with over $7 trillion of assets under management globally, voted against or withheld votes at 2,700-odd firms on that count alone. Taking the lead, European Union has gone ahead and introduced mandatory ESG rules effective March 2021 for all fund managers based in Europe. There is demand from across the investing ecosystem for companies that are performing well on ESG issues. No wonder, then, you have the whole ecosystem that has sprung up around ESG— from raters, scorers, sleuths, lawyers, even investigative hacks!
Clearly, there is a global movement towards making businesses more responsible and winds are blowing on our shores too. Companies Act, 2013, had expanded the definition of a business stakeholder to mean the larger community, and its mandated corporate social responsibility spends in some way had already elevated the discussion around a businesses’ boarder responsibility to the board level. Now, taking a cue from the changing global investor landscape, regulators in India are pushing the ESG envelope beyond monitoring the couple of ESG-specific funds or floating norms for Social Stock Exchanges. Market regulator Securities and Exchange Board of India (Sebi) recently introduced business responsibility and sustainability reporting for the top 1,000 firms. Sebi rules — following from Ministry of Corporate Affairs’ National Guidelines on Responsible Business Conduct introduced last year — are voluntary this year and mandatory from next. The rules require top firms to declare a host of issues around ESG — from energy, water, recycling intensity, disclosure and redressal norms, spends on research to better the firm’s environmental and social outcomes to gender diversity.
Global firms and funds, with mandatory compliance requirements in their home markets, will perhaps drive the first steps towards ESG compliance in India. Europe-based financial institutions, big investors in Indian markets and firms, will create the pressure for ESG compliance with their investee firms. In India, it is corporate governance that lies at the heart of most issues that plague the business environment, from banks’ bad debts to bankruptcy proceedings, so expect more scrutiny by global capital on the “G” of ESG here. Though it is early days, firms are seeing the benefits of complying. Already, according to MSCI India indices, listed companies adhering to ESG norms have outperformed others in the last seven of the 11 years ending December 2018. And ESG controversies, like at Rio Tinto, or our very own one on the rights of tribals at Niyamgiri in Odisha (involving metals giant Vedanta) will increasingly put the spotlight on ESG issues, and hopefully help expedite its mainstreaming.
 "CSR")
