India Together: ESG: A lot more S needed

India Together: ESG: A lot more S needed

GS paper 4

The social responsibility of companies is a lot more than a CSR program, which in any event is now mandated by law. It is also more than a mere Human Resources tool for employers to improve relations with employees, writes Harsh Shrivastava.

25 January 2021

The term ‘Environment, Social, and Corporate Governance’ has gained a lot of mileage in recent years. Typically, it refers to the three ways of measuring sustainability while investing in companies. It’s not new, and has evolved over 20 years from its predecessor, the ‘triple bottom line’. Hundreds of billions of dollars of investments in shares and bonds going to companies that do well on ESG parameters. This is increasingly happening in India as well with SEBI notifying guidelines about this that will be applicable to the thousand largest listed companies.

The E – Environment – is well understood, both in India and abroad. Benchmarks about energy consumption, and the sourcing of energy (how much is renewable) are often applied to companies. Water consumption, waste discharge, air pollution, and carbon emission are measured and tracked for big companies. There are some emerging nuances, especially those that emphasise accelerated adoption of sustainable practices, but this is largely something that investors believe they understand.

The G – Governance – is also now being understood with many new corporate governance norms coming into place — audit committees, separating the chief executive from the chairman, whistleblower policies, policies to protect women against sexual harassment, and more. It is still early days for these to be adopted in India, and much lip service to overcome as well, but over time we can expect an increasing number of yardsticks to be understood and adopted to improve the quality of India’s corporate governance.

Unfortunately, the S – Social – is very poorly understood. For some years, if the company had a well-run Corporate Social Responsibility program, that was considered sufficient to claim that it is meeting social investment requirements. Today, most Indian companies already have CSR programs, partly because the law mandates this. But the mandate has also made it harder to discern how one company may be doing better in Social governance than another, especially when both have reasonably well-managed CSR programs.

Capital is slowly shifting to companies that demonstrate greater adherence to ESG norms.

Social sustainability is more complex, especially in India. SEBI’s 2020 guidelines have included factors like provision of child care, health insurance, skill level, including that of disabled employees, gender diversity, etc. These follow the international trend of looking at Social sustainability mostly as a means for employers to improve relations with employees, in the process reducing it to something of a Human Resources tool rather than the pursuit of responsibility.

These small beginnings can be quickly strengthened. India Inc. should start looking at more things than employee engagement and CSR as its goals for Social Sustainability. We are a complex nation with a diverse society. Social sustainability should start with employees, but not only those on the company’s rolls, but also the many others in its ecosystem. There is some emerging acceptance of this wider responsibility, especially for health care and social security, but this could go a lot further if governments create multiple paths to desirable outcomes, especially with the rapid emergence of the gig economy. 

Companies in India are also operating in the world’s most complex society, with many religions, dozens of languages, many ethnicities, and countless castes and sub-castes. All these parts of our society affect businesses in India in small and big ways. From demands for reservations for some groups, to laws that make it compulsory to hire ‘locals’, there are numerous and changing expectations from businesses. Some states mandate that all signboards be in local languages, and the Interactive Voice Response System of companies in certain states default to the local language. 

Society is also changing. For instance, the Supreme Court has recently decriminalised homosexuality and lesbianism. Privacy has become a fundamental right. Such changes mean that Indian businesses must be attuned to what is happening in the country, but also keep an eye on the different states that they operate in, and sometimes in the localities too. For instance, tribals in certain areas of a state have some more rights over land; and certain sections of North-Eastern states are governed by autonomous district councils that impose their own unique codes and rules.

Somehow meeting all these rules is only one part of the challenge of Social sustainability. The other is to benefit from our society’s diversity by making small but well-thought-through interventions before being forced to do so. If a company starts business in a new state, it could consciously have a video made in that state’s language talking about why it’s there, and what it hopes to do for development in that state. It would not take much to offer subsidised health insurance to its entire ecosystem. Setting some kind of target for local hiring, or hiring women as well as under-represented groups can also help; even a small beginning would set the course for long-term its commitment to respect local social norms.

Each company will have different metrics to judge its Social sustainability, just as Environment sustainability will be different for an e-commerce company and a manufacturing company. Some are international norms; some are national laws; some are state-specific regulations. What should be the ratio of the indicators across these three levels that a company follows? Listing all the indicators that can be followed for Social sustainability is tough enough. But making a plan to pro-actively meet and achieve them — not just to respond to a crisis or a political agitation or law – is something that India’s businesses must practice more. 

Companies must also not assume that so long as the Government of India’s laws are met, one needn’t be responsive to state rules. Microfinance companies thought that as long as they met the RBI’s regulations on who to lend to and how much interest to charge, they could do business anywhere in India. They felt this because Finance is an entry in the Indian Constitution’s Union list, suggesting that this is an area of governance by the Central government. Yet, in December 2020, Assam passed a law to regulate microfinance in the state, irrespective of what the RBI may have said.

To sum up, investors, consultants, and regulators have a lot more thinking to do about the S of ESG investing in India – what it is, what it could be, and what it should be. Increasingly, the attention paid to this will determine how widely shared the benefits of development are in the country. 

Harsh Shrivastava’s professional career includes long stints in government, businesses, industry bodies, media, and civil society. He writes about the potential of Policies, Profits, Politics, and People to come together in a complex and evolving nation.

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