COMPLIANCE WITH ESG REPORTING FRAMEWORKS AND ESG SCORES CAN BE STRATEGIC TOOLS IF USED CORRECTLY.

SANJAY DESAI, CO-FOUNDER & REGIONAL DIRECTOR, HUMANA INTERNATIONAL GROUP

Is ESG a process cadence or an application tool? How should businesses get aligned to it?

ESG is a term used to represent an organisation's operational, business processes and financial efficiencies, focusing mainly on sustainable and ethical impacts to society and environment at large. Capital markets use ESG to evaluate organisations and determine future financial performance. While ethical, sustainable, and corporate governance are considered non-financial performance indicators, their role is to manage organisation’s impact, such as carbon footprint, GHG emissions and use of scares resources (esp. water).

Environmental factors are climate change, energy consumption and how much an organisation works to protect these resources and their impact on environment.

Social factors guide how an organisation treats their human capital, personal data protection & inculcate diversity and inclusion across the entire organisation physically.

Governance, as the word indicates, validates how organisations develop their corporate policies addressing internal checks & balances, transparency in reporting, integrity and ethics in their business transactions and dealings within and outside their organisations.

ESG has many different perspectives. You can look at it through a health and safety lens or a risk management lens or a reporting lens. On this note, I would like to echo a quote from the great leader, Mr. Mahatma Gandhi, “What we are doing to the forests of the world is but a mirror reflection of what we are doing to ourselves and to one another.”

For a long time, we heard about CSR. Are ESG and CSR the same or two different ends of the corporate philosophy?

ESG is a process tool that helps organisations to understand as to how they are managing the impact of their operations on environment / social cause / GHG emissions / CO2 disposition. This framework helps them to balance their financial investment v/s social and environmental impacts as well as gauge risk and opportunities in the future. ESG focuses on materials issue of an organisation.

CSR (Corporate Social Responsibility) is a form of self-regulation that reflects a business’s accountability and commitment to the well-being of communities and society through various environmental and social measures. It is a strong belief that CSR plays a crucial role in a company’s brand perception; attractiveness to customers, their investors, help retain talent and show overall business success. An organisation can implement four types of CSR efforts, viz., environmental initiatives, charity work, ethical labour practices and volunteer projects.

There are subtle differences, let us take a look at few of them…

Environmental Social Governance

GHG emissions: Amount of Scope 1, 2, and 3 emissions

Employee Diversity & Inclusion: Percentage of gender / racial or ethnic group representation for management and employees

Business ethics: Amount of net revenue in countries that have the twenty lowest rankings in Transparency International’s Corruption Perception Index

Water management: Total water consumption from all areas with water stress

Energy management: Total energy consumed, percentage grid electricity, percentage renewable electricity

Employee health and safety: Total recordable incident rate

Labour practices: Percentage of active workforce covered under collective bargaining agreements

What are the ESG metrics? Are they managed in the similar way as business metrics?

Interesting question… ESG metrics are indeed similar to business metrics in the way they decipher the data or both have similar quantitative and qualitative KPI formats. However, the outputs they track are different. ESG metrics are used to assess a company’s performance related to environmental, social, and governance issues, which, in turn, indicates whether an organisation is creating, reducing, or preserving the

Environmental Social Governance Corporate Social Responsibility

ESG is data oriented & the primary objective of ESG is reporting & disclosure to satisfy the requirements of customers/stakeholder and Board members.

ESG is an act of corporate compliance, which is fairly standardised, regulated and controlled.

ESG is more quantitative. Organisations need to collect & disclose significant amounts of quantitative data although qualitative data also has a key role in ESG reporting.

ESG’s focus is more on materials issues and their risk or impact to the environment, society, resources, and mankind.

CSR is often designed to engage employees and build a positive corporate reputation in the eyes of consumers and invested communities.

CSR engagement is voluntary and a self-generated initiative by the organisations.

CSR initiatives can certainly involve quantifiable goals. Reporting outcomes and their action planning is generally developed independently by the company for their own good.

CSR’s focus/ reporting will be to align to an organisation’s values, brand equity in the market including social scorecard.

Remuneration: Annual total compensation ratio of CEO to median for all employees

Business Model

Resilience: Amount/ percentage of material recycled, composted, and processed as waste energy

Source – Novisto / Gartner impacts to the environment, mankind, and resources. These metrics will include indicators such as GHG emissions intensity, amount of waste generated, and gender diversity in an organisation. Traditionally investors were looking at financial metrics or financial outcomes to judge the performance & quality of an organisation. But it has changed in the recent past. Now most investors also consider ESG metrics alongside financial data to access the viability and long-term performance of organisation in a more ‘sustainable’ way. Table above looks at a few metrics deeply…

What is a Carbon market

and how can an organisation be a part of it?

In simplistic form, carbon markets are trading systems where carbon credits are sold and bought by many organisations/ institutions. Carbon markets are still in their infancy and currently lack quality and credibility; technology can help in promoting their transparency, integrity, and usage. While the carbon markets are considered as legitimate globally, they do have their own issues. For example, a question comes to mind, does the carbon credit create real-world decarbonisation, and would that carbon emission be (really) offset if the credit was not purchased? Hence organisations who buy carbon credits need to ensure carbon offsetting is only utilised for the part of emissions that cannot be abated. While claims and offset quality may vary, offsets are on the rise and there is a need for carbon credit markets to be vigilant, credible, and transparent. There are two types of Carbon markets.

Regulatory or Compliance market: This market is getting bigger and bigger each year for last few years. At present, the global market size could be in the vicinity of US$265-275 billion. According to World Bank, there are over 47 national jurisdictions representing more than 20% of global GHG emissions. At a ballpark, academics estimate the real price of GHG emissions to be around $200 per tonne CO2e. However, the actual cost will vary from country to country.

Voluntary carbon market: This market is much smaller, fragmented, largely private, with varying standards. It is estimated that the market size is from $400 million to US$2 billion. The cost of carbon credits varies, particularly for carbon offsets since the value is linked closely to the perceived quality of the issuing company. Typically, voluntary credits are purchased by private companies all over the globe who want to compensate for their carbon footprints, especially those corporations who have strict sustainability targets and net zero strategies.

Over the last few years, supply chain is on the sustainability media radar. Few new terms we hear are “Sustainable Supply Chain Finance”, what does this mean?

Over the last few years, supply chain has been in the limelight for many right or wrong reasons… As the term indicates, these are two processes combined (Sustainability and Supply Chain Finance). From a practical definition point of view, sustainable supply chain finance is defined as financial practices and techniques those support trade transactions, in a manner which will help to reduce negative impacts and create environmental, social, and economic benefits to all stakeholders involved in bringing products and services to markets. Everyone is a winner in this process –The manufacturer, borrowers, lenders, consumers, and trade. Sustainable finance means investing money into organisations that demonstrate social values, good governance, and diversity & inclusion in their staff. It also means investing money in financial institutions / private funds managers who invest in their funds (lending) based on ESG principles.

Sustainability has rapidly become a core consideration in today’s corporate supply chain discussion, driven in large part by consumers and investors looking for more ethical manufacturing practices from the companies they buy from and invest in. Similarly on banking and trade finance front, having access to sustainable-labelled finance solutions is key for corporates to meet their ESG goals, whether it is reducing emissions or ensuring fair wages and working conditions among their suppliers.

While the above sounds very promising, please note these are purely corporate / Industrial or Institutional investors who have big pockets and are able to access the big data. For them more is merrier. For end consumers like us or small retail investors to openly embrace sustainable investments, the financial market needs to be much easily accessible & consistent with a personalised sustainability approach.

There is always room for improvement, given the advancement we have made on the technology spectrum. How are technology companies leveraging and leading the way in this global phenomenon?

Yes, data science and analytics will guide organisations to follow ESG principles to the core. Imagine that in the last turbulent three years, almost every industry suffered in some or the other way, but it is only technology industry, which remained relatively calm and resilient. They stood strong during the pandemic, many of them had double digit growth during 2021-22. In order to see their growth especially the tech start-ups who stand to benefit further with a renewed focus on ESG, one of the silver linings in an otherwise disastrous Covid-19 aftermath.

The technology industry is a significant contributor to the global carbon footprint, and almost 60% of IT industry emissions come from their hardware used by customers. This explains why these organisations are at the forefront of the corporate push for green energy globally. This also acts as a catalyst for other industries to invest & adopt similar technology and follow suit on their growth path. The big five tech companies (Amazon, Apple, Facebook, Google, and Microsoft) are all setting targets to use 100% renewable energy. Most of these industry players intend to be carbon-negative by as early as 2030.

In one example, datacentre providers in Singapore have had to be resourceful in their search for renewable energy, since the government has been critical of the industry’s large carbon footprint. In March 2021, solar energy provider Sunseap, which works with Microsoft and Apple’s datacentres in Singapore, unveiled a floating solar farm that could produce an estimated six-millionkilowatt hours of energy per year at 5MW peak installation. Industry participants are also discussing the expansion of datacentres powered by onsite generated hydrogen.

Greta Thunberg talks about climate change, global warming in her book The Climate Book published recently. A teenager from Sweden has succeeded in shifting the global attention around climate emergency. Taking a cue from this, what actions should each of us at corporate as well as personal level take?

The message that I got reading through all the wonderful writings in that book was, “Let's get serious about the climate issue and collaborate to make sure that we can save our species by taking concrete actions in our day-to-day lives”. For example, switch to LED lights, stop using single use plastic, make sure that you are always reminded like I am reminded of the 17 SDGs. It is a question of how we can integrate the whole thought process about the material things that can make a difference to our emissions which are destroying the planet. First lesson is owning up the responsibility. Second let us have our own action plans at corporate level, at individual level and at community level. We have seen so many instances in the last one year that it is now very clear that it is Human Action, which can turn the needle back from the Armageddon that we face if we continue along our past ways. That is the big lesson for all of us from the book.

What is greenwashing? How can consumers differentiate between an organisation which is involved in greenwashing v/s with the one which is genuinely investing in sustainable products?

Recently a PwC report was released, which indicates that in 87% of the reports on sustainability, greenwashing of some kind was discovered. Now that is an extremely high percentage. I am reminded of the recent UN expert panel, set up to examine net-zero claims made by non-state organizations – which calls for regulation to stop baseless environmental claims by companies, banks, and municipalities. Calling for regulation to ensure pledges are genuine, the panel highlighted, “Deceptive or misleading net zero claims by nonstate actors not only erode confidence in net zero pledges overall, but they also undermine sovereign state commitments and understate the work required to achieve global net zero.”

Greenwashing is overstating a company’s climate change contribution. False environmental claims are harming the fight against climate change. Let us say that companies are reporting on some recycling initiative, and they are recycling some of the plastic that they have collected out of their own efforts. Now if they overstate the input-output ratio from the plastic that they are trying to recycle to make the end product, then they are greenwashing. They are not actually performing the role of reducing the impact on the planet and are still claiming it.

Let me give you three instances of out-of-the-box ideas that people are now using to first reduce their footprint and then making sure that the reporting is correct… w Switch from the idea of data entry to data set capture as it arises. Therefore, all measurements in the future will happen as the physical flow of materials of energy, of everything that you are using in the whole supply chain gets consumed. w Block chain the process so that you have no chance of over-reporting or under-reporting and that will be a great dampener on greenwashing. w Disrupt your supply chain completely. This is what at least one Cement Group in the country is thinking about. They are planning to develop the grinding units across the entire coastline that India has so that the distance that the material has to travel to reach to the end consumer gets drastically reduced. That is an example of domestic supply chain reimagination, which can dramatically alter the amount of footprint from cradle to grave.

These are the ways in which you can identify greenwashing, reduce it, and make sure that your measurement systems are such that they will automatically produce accurate data to be reported.

Is there a global organization or an association which can coordinate prompt sharing of this green technology and measuring it as a common initiative?

This is one area where the whole world has got together to actually make sure that the standards of reporting and the frameworks of reporting get commonalised. This effort is today housed under the International Sustainability Standards Board (ISSB) in London. There is a convergence happening in both frameworks for reporting as well as the standards based on which companies will report all the information that they need to provide in the regulatory reports on sustainability. ISSB is that one central organisation that we need to keep watching out for. It will be the fastest issuer of standards on sustainability that the world has ever seen. In two years’, we will have a common framework and tangible standards of measurement.

There are many sustainably standards GRI, ISB, IFC, CDP etc. Is there a feasibility of having just one or two common standards? I think convergence is necessary, but I do want to talk about heuristics in Scope 3 emissions. In India, we will soon see the emergence of BRSR light, which is being designed for simpler organisations, which are just a part of a supply chain. We must realise that Scope 3 emissions are, in many instances, between 75% and 85% of all emissions that a company is actually responsible. It is critical that in some way we are able to estimate if we cannot measure these things accurately. The small organisations do not have the resources to do that.

So, we would have to unleash the forces of collaboration, innovation, acceptance of technology and change of mindset to make sure that we get to the root of it. We need to completely eliminate the carbon footprint that we are causing and one of the ideas that I am also a great believer of, is green hydrogen, green ammonia and ultimately, we will see some version of fusion, which will enable us to eradicate the problem of greenhouse gases altogether, so I am a great votary of that.

Agricultural Sustainability means - using farming practices which adhere to ecological cycles. India is used to "Traditional Farming". How, as a nation, do we transition to this approach? What role does Pradhan Mantri Krishi Sinchai Yojana (PMKSY) play in this transition?

I will share with everybody a wonderful experiment that is being done at a place called Parli by an organization called Global Parli in Maharashtra. The idea is that we need to wean people away from high water consuming crops, which are – one completely destructive of the environment, using up a very scarce resource like water and are not even good in terms of the output that they generate. For example, if you were to go on a sugar fast, the first thing that you will have to eliminate is your consumption of Wheat and rice. Therefore, this experiment envisions to disrupt the habits and the allocation of land to appropriate crops, which will be sustainable in the long run from the point of view of input consumption and energy released from the output. In addition to that, multicropping is being considered to bring in exotic vegetables and fruits to make sure that the right mix of food that we need to produce for good energy, good health, and good immunity, comes into being.

As a matter of fact, Global Parli movement has planted 2.5 crore + fruit trees in the last three and half years, benefitting thousands of farmers and greening the environment. This is an experiment, which is highly replicable, can be performed in many parts, not only in India but in the whole world. Also, let's not forget that the world is now beginning to see the massive benefits of hydroponics, aeroponics, greenhouse cultivation and farming, which is on steroids because you take care of it through using machine learning and artificial intelligence. The use of micronutrients and micro water delivery to the plant as it needs it and as it demands it dramatically alters productivity.

Today a whole lot of the water and the nutrients that we are using are simply wasted because the plant cannot absorb it and that is being changed by bringing in this technology of hydroponics and aeroponics. This is a very major contribution that the world can actually receive from Agri-innovation.

With ESG rapidly growing in India who is leading the push is it the institutional investors or is it the government or is the Venture Capitalist?

Fortunately for us in India, the government is extremely serious on this matter. For the government to have chosen ESG as one of the frontiers in its leadership at the G20 is itself a huge indicator of the government's intent. I must give full credit to the Government of India for the amazing thrust that they are taking on this front. Add to that the tremendous leadership that is being displayed by our large industrialists. While, on one hand, all of them are competing with each other to get to the highest ranks in ESGI, but at the same time, they are making sure that we have a great ESG expanse to look up to for our future generations to embrace and imbibe.

Everyone in the value chain aspires to do better in terms of environmental portrait – the industrialists are on board; the NGOs are phenomenally on board. I can sense that the extent of work, which is being done in India, is impressive and we should be proud of the way we have embraced all the 17 SDGs and the way that industry and the government partnership is shaping up across the board to make sure that this becomes reality. There is a long way to go, but the start is fabulous. Having said that, the largest emission action has to be taken by the Western world and even if we were to take all these actions, we are not going to be able to actually limit the increase in temperature to 1.5 degrees Celsius unless the whole world starts becoming serious about it.

Crypto is gaining grounds. The big problem with Crypto is Energy consumption. It takes an estimated 1,449-kilowatt hours (kWh) of energy to mine a single bitcoin. How do we tackle the massive surge in energy consumption besides the environmental pollution? Let me let me give you a very out of the box thought… what is the Bitcoin? Can you not think about it as a storehouse of energy that might otherwise be wasted? The energy to mine it is being utilised to transfer that mass quantity of energy, which otherwise would have been lost. Bulk of the world's mining is being done in the extreme northern limits and extreme south having extreme weather conditions with abundance of power. It becomes a question of enabling that power to be transferred to places where that power is not actually available.

I am not a votary of Bitcoin at all but let us not confuse Blockchain with Bitcoin. Blockchain is important because it creates decentralization, transparency, and the ability for people to share without feeling concerned or threatened by who is going to see it because it is only the permissioned people who will be able to access that open ledger. Blockchain is an extremely valuable concept, which will not only create the use case of Bitcoin, but many other use cases. It is not cryptocurrencies that I am tracking, I am tracking the Central Bank digital currency, a revolution that is taking the world over and that I think is an exceptionally positive move by the entire world.

The cost of using cash is the highest cost of any other method of exchange and therefore the faster we wean ourselves away from Hard Cash, the better it is. All other forms are intermediates to an absolute adoption of digital currency using identity layers, using the layer of recognition and the layer of transfer so if you can get a whole Central Bank Digital Currency (CBDC) framework, we can see a very different world.