21 May 2024 : Indian Express Editorial Analysis

1. A better do-good metric

Topic: GS2 – Governance – Government policies – Interventions for development in various sectors

Context:

Environmental, Social, and Governance (ESG) criteria have emerged as a critical framework guiding modern business practices, government policies, and civil society initiatives. Originating from the interconnected realms of these sectors, ESG aims to manage the environmental and social impacts of organizations while addressing governance issues. Companies now integrate ESG metrics into their operations, often assessed by rating agencies, to mitigate risks and comply with regulatory requirements. These ratings have become essential for firms to attract investment from those prioritizing sustainability and ethical governance, particularly in sectors with significant environmental footprints, such as energy and mining.

What is ESG?

• ESG goals are a set of standards for a company’s operations that force companies to follow better governance, ethical practices, environment-friendly measures and social responsibility.
• 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.
• It focuses on non-financial factors as a metric for guiding investment decisions wherein increased financial returns is no longer the sole objective of investors.
• Ever since the introduction of the United Nations Principles for Responsible Investing (UNPRI) in 2006, the ESG framework has been recognised as an inextricable link of modern-day businesses.

Differing from CSR:

• India has a robust Corporate Social Responsibility (CSR) policy that mandates that corporations engage in initiatives that contribute to the welfare of society.
• This mandate was codified into law with the passage of the 2014 and 2021 amendments to the Companies Act of 2013.
• The amendments require companies in any given financial year to spend at least 2% of their net profit over the preceding three years on CSR activities.
• Whereas ESG regulations differ in process and impact.

Historical Context and Evolution:

• The concept of ESG is relatively young, having been formally introduced in a 2005 UN report titled “Who Cares Wins: Connecting Financial Markets to a Changing World.”
• This report urged financial institutions, investors, and regulators to collaborate in promoting sustainable practices.
• Today, ESG principles are deeply embedded in the global corporate landscape. According to the Global Sustainable Investment Review 2022, ESG-driven investments now represent over a third of all assets under management worldwide, underscoring the widespread adoption and importance of this framework.

The Challenges of Measuring ESG:

• The measurement of ESG performance has spawned a thriving industry with various reporting frameworks and metrics.
• However, the lack of standardization and inherent subjectivity in these evaluations often undermines their credibility.
• Reports indicate that ESG ratings from different agencies align only about half the time, highlighting the inconsistencies and challenges in achieving a unified assessment approach.
• The complexity and diversity of factors involved make the prospect of standardized ESG metrics seem distant, posing a significant hurdle for consistent and reliable evaluations.

Critical Reevaluation of ESG Practices:

• Two decades after its inception, there is growing scrutiny of the ESG framework. Questions are being raised about its effectiveness and inherent deficiencies.
• Notably, BlackRock, the world’s largest asset manager, has distanced itself from the ESG acronym, suggesting it is in a “death spiral.”
• A fundamental criticism is that ESG ratings often focus on how external risks like climate change and social upheaval affect an organization’s performance, rather than how the organization impacts the environment and society—a concept known as “single materiality.”
• Efforts to adopt “double materiality,” which considers both internal and external impacts, face significant challenges due to their complexity and reliance on uncertain assumptions.

The Paradox of Combined ESG Metrics:

• Combining the E, S, and G components into a single evaluation metric can lead to paradoxical outcomes. For example, Dow Jones Indices excluded Tesla from the S&P Sustainability Index due to workplace and governance issues while retaining Exxon Mobil, an oil giant.
• Similarly, some cigarette companies have been rated as more ethical investment destinations than Tesla, highlighting the inconsistencies and potential misalignments in the current ESG evaluation approach.

Toward a More Focused ESG Framework:

• The critique of the ESG framework suggests that it might be serving as a superficial solution, avoiding the difficult decisions needed to address critical issues like climate change and inequality.
• There is an emerging consensus that organizations should prioritize environmental concerns, particularly emissions reduction and mitigating adverse climate impacts, while separately addressing social and governance aspects.
• This separation could enhance comparability and clarity, ensuring a focused approach to the most pressing challenges.

Conclusion:

• Experts argue that ESG, “born in sanctimony, nurtured with hypocrisy, and sold with sophistry,” needs a fundamental overhaul.
• Simplifying the ESG framework to focus primarily on environmental impacts, particularly emissions reduction, could lead to more effective and measurable outcomes.
• By unbundling the ESG matrix, organizations can better align their strategies with the critical essentials necessary for our survival, addressing the urgent need for environmental sustainability while separately managing social and governance issues.

What is the Need for ESG in India?

India faces significant environmental challenges, including air and water pollution, deforestation, and climate change, also there are significant social challenges such as poverty, inequality, discrimination, and human rights abuses, making the importance of investing in companies that are committed to addressing these issues and promoting social justice. India has a complex regulatory and legal environment, and companies operating in India may face challenges related to corruption, regulatory compliance, and corporate governance. Therefore, there is an increasing need for recognizing the companies with strong governance practices to mitigate these risks. What are the Challenges related to ESG Compliance in India? Limited Awareness: Many companies in India may not be fully aware of the importance of ESG factors or may not have the resources to integrate ESG considerations into their business practices. Inadequate Data: In India, there may be limited publicly available data on ESG factors for companies, making it difficult for investors to evaluate ESG performance and make informed investment decisions. Weak Regulatory Environment: India’s regulatory environment may not be fully developed or enforced to ensure ESG compliance by companies. This may lead to a lack of accountability and transparency in corporate practices. Cultural Factors: India has a diverse cultural landscape, and some traditional business practices may not align with ESG principles. Companies may need to navigate these cultural factors to implement ESG policies effectively. Limited ESG-focused Investment Options: Investors may have limited investment options that focus specifically on ESG factors in India, making it difficult to fully integrate ESG considerations into investment decision-making.

Practice Question:  Critically examine the effectiveness and challenges of the Environmental, Social, and Governance (ESG) framework in shaping modern business practices. Discuss whether a more focused approach on environmental sustainability, particularly emissions reduction, could enhance the impact of ESG initiatives. (250 words/15 m)

2. LOYALTY DOESN’T PAY

Topic: GS2 – Polity

Context:

The concept of loyalty carries different implications for politicians and voters. For politicians, disloyalty can harm their careers, jeopardizing their prospects and diminishing their influence. However, for voters, unwavering loyalty can be detrimental to society. Loyal voters are often taken for granted by politicians, leading to political complacency and a lack of accountability. In contrast, an informed voter critically evaluates candidates and policies, using their judgment to make decisions that reflect a deep understanding of societal needs and future implications.

The Pitfalls of Being a Loyal Voter:

• Loyal voters provide politicians with a sense of security that can foster complacency. Politicians can manipulate the image they project to these voters, ensuring that inconvenient truths and critical facts remain obscured.
• This manipulation can have far-reaching consequences, harming not only the current electorate but also future generations.
• This phenomenon transcends party lines, ideologies, castes, religions, regions, and languages.
• When voters are reduced to a “vote bank” based on these identities, they should feel insulted. It suggests a lack of independent thought and critical engagement, which are essential for a healthy democracy.

The Role of an Aware Voter:

• An aware voter is one who does not remain loyal to a political party or candidate blindly. Such a voter continuously evaluates political actions and decisions, ensuring that their vote is not taken for granted.
• This type of voter holds politicians accountable and demands transparency and responsiveness.
• A truly aware voter reverts to being a vigilant citizen immediately after casting their vote, not remaining tied to their choice for the entire electoral cycle. This ongoing critical engagement is crucial for a functioning democracy.

Social Media and the Courage to Admit Mistakes:

• The advent of social media has added a layer of complexity to political engagement. It allows individuals to voice their opinions publicly but also makes it difficult to retract those views once expressed.
• Admitting a mistake or changing one’s stance requires significant courage, especially in the face of potential online backlash and trolling.
• This reluctance to publicly acknowledge errors can trap voters in their initial choices, preventing them from evolving their views based on new information and insights.

The Importance of Not Being Taken for Granted:

• Feeling taken for granted can be painful in personal relationships, and it should be even more troubling in the public sphere.
• If politicians are certain of their voter base, they may neglect to address the real needs and concerns of the electorate.
• This certainty can lead to a lack of genuine engagement and meaningful policy changes.
• It is vital for voters to remain prudent and critical, ensuring that politicians do not become complacent or unaccountable.

Conclusion:

• Voting is a fundamental duty of every citizen, but it is equally important to exercise this duty with prudence.
• Being a loyal voter can undermine the democratic process by enabling political complacency and manipulation.
• Instead, voters should strive to remain informed, critical, and willing to change their views as necessary.
• This approach not only enhances the quality of democratic engagement but also ensures that politicians remain responsive and accountable to the needs of the society they serve.

What is the importance of voting in a parliamentary democracy?

Voting is essential in parliamentary democracy as it allows citizens to elect their representatives and have a say in the decision-making process of their government. Exercise of constitutional right: Voting is a constitutional right that allows citizens to choose their representatives who will make decisions on their behalf. (Article 326) Ensuring representation: For adequate representation in the government, people can elect the candidate of their choice, who will represent their interests and needs in the Parliament. Holding political accountability: The election is an opportunity to hold politicians accountable for their work based on their previous performances. Encouraging participation and engagement: Voting allows citizens to have a say in the direction of their country and to participate in shaping the future of their community.

PYQ: To enhance the quality of democracy in India the Election Commission of India has proposed electoral reforms in 2016. What are the suggested reforms and how far are they significant to make democracy successful? (250 words/15m) (UPSC CSE (M) GS-2 2017)

Practice Question:  Discuss the implications of voter loyalty on democratic accountability and political complacency. How does an informed and aware voter contribute to a healthier democracy? (250 words/15 m)