11 Mar 2024 : Daily Answer Writing
Q1) The interconnectedness of environmental, social, and governance (ESG) factors emphasize the need for responsible and inclusive business practices. In this perspective, discuss how the ESG framework is reshaping corporate governance?
(150 Words/10 Marks)
ANSWER
Corporate governance refers to the system of rules, practices, and processes by which companies are directed and controlled. Environmental, social, and governance (ESG) factors are part of a reporting framework used to assess the performance of an organization on sustainability metrics beyond just environmental factors.
The ESG framework is reshaping corporate governance in the following ways:
- Diversity:
- The emphasis on diverse boards reduces groupthink through diverse perspectives, and enhances the board’s ability to effectively address ESG risks and opportunities.
E.g., gender, caste or racial representation in board.
- Companies are encouraged to have socio-economic diversity in their employee base.
E.g., companies with greater share of women employees receive higher ESG ratings.
- Stakeholder Engagement: ESG principles prioritize the interests of all the stakeholders over shareholders. This includes engaging with employees, customers, suppliers, local communities, etc. Stakeholder perspectives enable informed decisions with due consideration to the social and environmental impacts of business practices.
- Green Investments: Reporting on ESG factors enable socially-responsible investing and mobilization of climate finance and.
E.g., carbon trading.
- Transparency: ESG principles entail transparent disclosure practices that require companies to identify and address ESG-related risks.
E.g., ethical issues like ‘sweatshops’ in Bangladesh or ‘re-education centres’/mass-internment camps for Uighurs in China.
- Long-Term Sustainability: ESG principles emphasize the need for businesses to adopt a long-term perspective. Companies are encouraged to integrate ESG factors into their strategic planning, investment decisions, and performance evaluation.
E.g., ONGC’s investments in renewable power, ITC’s R&D for biodegradable packaging.
Despite the positive impact of ESG principles on corporate governance, there are certain challenges with respect to ESG principles, as discussed below:
- Greenwashing: ESG principles are used for mis-selling investments in unstainable and harmful industries.
E.g., global tobacco giant Philp Morris has higher ESG rating than electric car manufacturer Tesla.
- Standardization and harmonization of ESG reporting frameworks is needed to ensure consistency and comparability across industries and regions.
- Meaningful Implementation: ESG ratings are used as box-ticking exercises. There is inadequate data collection, lack of internal expertise, or resistance to disclosing sensitive information.
- Limited Regulatory Framework: ESG-framework is still an evolving area of corporate governance. The regulations in India are not comprehensive enough to address all the issues related to sustainability and responsible business practices.
The growing recognition of the interconnectedness of environmental, social, and governance (ESG) factors is increasingly influencing decision-making processes and holding companies accountable on principles of sustainability. The SEBI guidelines on Business Responsibility and Sustainability Report for ESG reporting for top-150 listed companies from FY2024 is a step in the right direction for promoting responsible and inclusive business practices in India.
