What is ESG?

ESG is a term that is gaining prevalence in the west to today - mostly among financial market players. Fund and portfolio managers, as well as investors are running a sprightly eye of certain criteria that a company reports on, before making their investment decisions. ESG stands for Environmental, Social and Governance indicators that a company can choose to benchmark against and present the facts to all stakeholders. While it is neither mandatory in USA nor Europe more and more companies are reporting on parameters relating to ESG to demonstrate a company’s overall responsibility in these matters.The European Federation of Financial Analysts Societies (EFFAS) has listed the areas that ESG should relate to, and has even evolved a set of Key Performance Indicators (KPIs) to measure corporate performance.

The nine listed areas shed great light on what modern responsible corporations will need to be demonstrative of in the next decade. They are:

1) Energy efficiency

2) Greenhouse gas (GHG) emissions

3) Staff turnover

4) Training & qualification

5) Maturity of Workforce

6) Absenteeism rate

7) Litigation risks

8) Corruption

9) Revenues from new products

Source: Céline Louche, assistant professor of corporate responsibility, Vlerick Leuven Gent Management School, Belgium; and the Financial Times Lexicon.

As can be expected there is no mandatory or voluntary reporting of these facts in India. While a few companies write notes on their corporate social responsibility mandate in their ‘Annual Reports’ and Websites, they do not address important governance and ethical issues like Corruption and Absenteeism. Some would like to argue that the economic counterpane in India is a wrinkled spread and these issues are difficult to iron-out, much less admit to. Besides, how do you report on a matter such as corruption? However, these parameters seem to have been put there more as deterrents as opposed to any admission of such practices.

The Financial Times Lexicon also draws attention to: “The UN-backed Principles for Responsible Investment (PRI) provides a voluntary ESG framework for companies and funds, from which investors can make informed investment decisions that relate to sustainability and governance practices.” As more nodal agencies prescribe a set of ESG guidelines more sectors in industry will begin to adopt these measures. It will be of critical importance to the third-world and India to see how these measures percolate down the corporate river of obfuscation and misreporting.