In recent years, conversations surrounding Environmental, Social, and Governance (ESG) and climate change have intensified, underscoring their importance in today’s world. It is crucial to understand why ESG and climate risk management have become pivotal in shaping the future of businesses and economies globally, and in India in particular.
Key developments in 2023 in ESG and climate risk
2023 marked a significant year where ESG and climate risk emerged as major macroeconomic forces, influencing economic sustainability as well as corporate strategy. During this period, businesses observed significant regulatory changes in the ESG arena and faced considerable hurdles in aligning with evolving ESG standards Recognizing the vital role of ESG and climate risk management in charting sustainable economic growth, businesses and policymakers have both increased their focus on these areas. This was caused by major factors, including increasing dialogue around ESG and climate change, regulatory reforms, and challenges in adapting to the new norms:
- ESG awareness: The growing frequency and intensity of dialogue around ESG issues and climate change reflect rising global consciousness on the topic and increasing urgency surrounding sustainable practices and environmental stewardship. The overwhelming majority of S&P 500 companies now publishing ESG reports in some form signifies the growing significance in the corporate sector.
- Regulatory reforms: International regulatory bodies as well as the Indian government and regulatory bodies in India, introduced new regulations and policies, prioritizing ESG and sustainability. These reforms have played a pivotal role in steering businesses towards more sustainable practices.
- Compliance challenges: At a global scale, companies continue to face unique challenges in adapting to the new ESG requirements due to the need to integrate these practices into established business models. The transition involves overhauling legacy systems, instigating cultural shifts within organizations, and allocating significant resources for compliance. The complex nature of the ESG regulatory landscape adds to these challenges, alongside the need to balance diverse stakeholder interests in a competitive market.
Key focus areas for corporates in ESG and climate risk
The above factors collectively highlight the need for a strategic, context-sensitive approach to ESG integration. However, companies have already started adopting various strategies to align with ESG norms on a global scale. These include:
- Focus on promoting sustainable practices: There has been a significant shift towards promoting sustainable practices in areas like workforce management, process improvement, and technology-enablement. This includes investing in employee training and development to enhance understanding of ESG principles and hiring experts to lead sustainability initiatives. Efforts are also focused on cultivating a workplace culture that values sustainability. Operationally, companies are revising processes for greater sustainability, incorporating eco-friendly manufacturing practices and transparent supply chains. There is a move towards utilizing data analytics and AI for ESG metrics management, tracking carbon footprints, optimizing resource use, and investing in clean energy.
- Risk assessment evolution: Businesses began embracing comprehensive risk management strategies, acknowledging the complex nature of ESG risks. These strategies go beyond traditional financial and operational risks to include a broader spectrum of ESG factors. Companies are increasingly analyzing how environmental issues, such as climate change and resource scarcity, as well as social factors like employee welfare and community impacts, could affect their long-term sustainability and reputation. Moreover, governance aspects, including regulatory compliance and ethical conduct, are being scrutinized more closely.
- Mitigation efforts: Efforts to reduce environmental impact and enhance social welfare became more pronounced, reflecting a deeper commitment to ESG principles. The focus now is on strengthening these initiatives and embedding them into the core values of businesses. Businesses are actively engaging in initiatives like reducing greenhouse gas emissions and investing in community development projects. The focus now extends to embedding these sustainability initiatives into the very fabric of businesses, including integrating ESG considerations into decision-making processes, corporate policies, and long-term strategic planning.
ESG in India: A 2023 perspective
Reports say that more Indian firms consider climate strategy a key concern when compared with their global counterparts. A World Bank report puts India currently at considerable risk for climate-related repercussions due to unregulated construction and urbanization that is often unplanned. Regulatory efforts have also been gaining steam in India too. In July 2023, India’s Securities and Exchange Board of India (SEBI) released a comprehensive framework that laid out specific requirements for disclosures and assurances related to Business Responsibility and Sustainability Reporting (BRSR). The introduction of this framework by SEBI marks a significant step in the direction of reinforcing transparency and accountability in corporate India’s approach to sustainability and ESG issues. Notably, this framework includes:
- BRSR Core: This part of the framework defines the core elements of BRSR, detailing the mandatory disclosures that companies need to adhere to in their sustainability and responsibility reporting.
- Revised BRSR Format: SEBI introduced a revised format for BRSR, aimed at making sustainability reporting more structured and standardized across different organizations. This updated format is expected to enhance the clarity and comparability of ESG disclosures.
- Assurance requirements for BRSR Core and value chain: SEBI has also mandated ESG disclosures for the value chain and limited assurance for select entities to begin with.
The future of ESG and climate risk management
As we look ahead, the trajectory for ESG and climate risk management looks promising:
- Accelerated adoption: In 2024, we expect to see ESG evolving into a core business function that directly impacts the long-term profitability of a company. In countries like India, the landscape of ESG and climate risk management is expected to continue evolving, driven by innovation, regulatory advancements, and economic transformation.
- Challenges and opportunities: Strengthening certain disclosures, such as those related to supply chain emissions and GHG footprint, remains a challenge. Balancing rapid economic growth with sustainable practices also poses a significant challenge. Additionally, regulatory ambiguities continue to place significant pressure on companies that are struggling to keep pace with mandates while simultaneously decoding the complexities they bring to the table.
- Reporting turns mandatory: With “mandatory financial disclosure” becoming a lynchpin, ESG reporting will continue to gain prominence in 2024. The EU’s Corporate Sustainability Reporting Directive (CSRD) for example mandates almost 50,000 companies to be subject to compulsory sustainability reporting. This also includes companies belonging to other countries, which operate business units within the EU. Meanwhile in parts of the US, publicly listed companies may be mandated to report on ESG within the next two years, making ESG a priority agenda for most companies.
In summary, 2023 was a transformative year for ESG and climate risk management, setting a new direction for sustainable and responsible business practices. As businesses and policymakers continue to navigate this landscape, the focus will be on developing resilient and ethical business models that align with the global shift towards sustainability.
(Authored by Jaya Vaidhyanathan, CEO, BCT Digital.)
