Challenges of developing data pool on ESG by dr. K. Srinivasa Rao

challenges of developing data pool on ESG

by dr. K. Srinivasa Rao

Commercial entities are broadly focused on business centricity. The regulators also orchestrate surveillance and supervision to monitor the quality of operations, governance, risk and compliance (GRC). They are seldom focused on overseeing compliances related to parameters measuring Environmental Social Governance (ESG) efforts. In the process, though the organizations are ESG centric, they may not find it necessary to develop data base making it difficult to measure the efforts. Historically, ESG activities are considered as philanthropic for the well-being of the society. They are not reckoned as an integral part of mainstream activities of the organization and are usually not mapped to the data system making it equally difficult to monitor, measure and intensify ESG efforts. This puts ESG compliance on backfoot.

Looking to the intensity of environmental degradation, global warming, pollution, deforestation, exploration of fossil fuels, etc. and their consequential threat to the life and livelihood of people, the focus is shifted back to ESG compliance. The frequency of natural calamities and its fury is already creating crisis for people in different geographies.

The trend is even threatening the habitability of the planet for coming generations. Unless corporate entities act now with multipronged inclusive approach working upon concrete contribution towards ESG, it will be difficult to contain the fury of climate risk. Collective and concerted action across the globe is needed, among others, for afforestation, shunning dependency on fossil fuel (coal, gas and oil), reduction of fossil fuel subsidies and its explorations.

1. COP26 deliberations:

It can be recalled that 26th United Nations Conference of Parties (COP26) at Glasgow have highlighted the overwhelming climate risks posing serious threat to the planet. There was consensus to adhere to COP 21 - Paris agreement (2015) accords to contain rise in the average global temperature limited to 1.5 degrees above pre-industrial levels. Participating countries were encouraged to strengthen their emission reduction resolution and to align their national climate action pledges with the Paris Agreement. The two-week long COP26 deliberations convincingly impressed upon members to act and realize its goals in both letter and spirit.

Keeping these priorities in view, various governments have begun to focus on ESG to ensure that damage from climate risks are contained. Regulators across the globe have also begun to insist that listed companies and commercial entities as corporate citizens have to not only accelerate efforts under ESG but should also capture essential data points to be able to show progress and make sustained efforts to improve performance.

2. ESG impact:

3. challenges in managing ESG:

Globally, the ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Basel Committee on Banking Supervision (BCBS) in its paper on ‘Climate-related risk drivers and their transmission channels’ (April 2021) clearly highlighted the risks to the financial system if ESG is not enforced in letter and spirit.

Banks and the banking system are exposed to climate change through macro- and microeconomic transmission channels that arise from two distinct types of climate risk drivers. First, they may suffer from the economic costs and financial losses resulting from the increasing severity and frequency of physical climate risk drivers.

Second, economies seek to reduce carbon dioxide emissions, which make up the vast majority of greenhouse gas (GHG) emissions. These efforts generate transition risk drivers. These arise through changes in government policies, technological developments, or investor and consumer sentiment. They may also generate significant costs and losses for banks and the banking system.

Taking cue from the intensity of impact of climate risk, its domino impact on the sustainability of businesses and global targets set under COP26 deliberations, the business entities should not only accelerate the efforts under ESG but must institutionalize data-based review and monitoring. Unless the data is developed to measure performance, there cannot be targeted move and efforts to achieve them. Times ahead, there will be environment friendly investors who allocate funds only in companies that are ESG centric. The disclosures and transparency of the entities have to be based upon ESG performance data. Initially there will be challenges in capturing that kind of data as the technology architecture may have to be rebuilt to accommodate the relevant data points.

Many securities market and financial sector regulators are insisting disclosure of information on ESG compliance so that socially conscious companies could be separated from others. In the future, nonattention on ESG activities could also be self-defeating as such companies may not be able to attract investments/equity. With the governments becoming conscious and regulators making it mandatory, the corporate entities will have to overcome the challenges and raise the bar of performance to contribute to ESG and pool the relevant data for greater good.

author

Srinivasa Rao

Srinivasa Rao teaches risk management at the Institute of Insurance and Risk Management (IIRM), Hyderabad. India. He has been with Bank of Baroda with wide experience in managing risks at the corporate level. He was associated with business process reengineering and was engaged in asset liability management. He worked to design bank level policies to manage diverse risks in business operations.

He is passionate in teaching, writing and publishing. He brings his vast industry experience to the classroom in B – Schools. He is keen in disseminating digital and financial literacy to ensure that stakeholders are able to explore the power of digital banking.