Legal Era | 19th November 2022
LE: Let’s start with the fundamentals, Rajesh. Could you walk us through the concept of ESG?
So, in the early 2000s, terms like ESG (Environmental, Societal, and Governance) gained momentum on a global scale. The UN and other international organizations started focusing on business concepts that were unrelated to shareholder or business interests alone. That means a shift from a capitalist focus to considerations regarding environmental and societal impact – like how business decisions impact the community, underprivileged societies, and our environment. This shift has aided the movement towards ESG globally.
A simple example is the world’s slow move from fuelpowered vehicles to electric vehicles – issues regarding carbon footprint and other detrimental business impacts were earlier treated with a Laissez-faire policy, but today, things have changed significantly.
ESG is the natural extension of organizational charity – including governance implications on nonfundamental economic principles. It is extremely important for businesses to consider in terms of value creation. Even though we aren’t used to the terminology or all that it encompasses, ESG is becoming more widely accepted. It also defines the tools that these organizations need to address the gambit of ESG.
LE: This is interesting. Of all the terms floating around, why was the all-encompassing ESG selected?
You see, all other policies are only related to the environment, human rights or a particular ecosystem, in a silo. However, each of these segments is fundamentally interconnected and cannot be limited to how boards function. Before ESG, environmental compliance was unheard of, but now you might earn Mutual Fund investments or a cheaper rate of interest from a bank for being ESG compliant. Essentially, ESG is a product of these various factors that influence it. In India, we started with CSR activities and have now progressed to ESG with initiatives from big institutions like MCA and SEBI, which has encouraged other businesses to move in this direction.
LE: There are many who may use the terms CSR and ESG interchangeably which may not be correct. Could you bridge this gap between the understanding of CSR and people’s receptiveness to ESG?
Well, ESG is a natural extension of CSR. In the past, CSR has primarily been associated with businesses or companies well before it became mandatory. Government and private businesses invested in CSR activities that date back to the Vedic era, where kings and leaders proactively contributed to their societies. More recently, big corporations like the Tatas or Birla’s have been major contributors to society – from temples to hospitals. On a much smaller scale, most people are inclined to contribute towards charitable organizations.
All of this has happened without any law in place. Given that CSR has been conducted while it is still voluntary, the question of government interference arises: Is it really necessary?
I believe government interference is important for the benefit of everyone and equitable charity. Being held accountable to contribute in specific ways can strategically end many issues plaguing our societies and environment. CSR generally targets research, child welfare programs, medicine/hospitals, or even issues around diversity and inclusion. But is that enough? No. Not when we’re talking about global warming, the Amazonian Forest fires, and the overall carbon footprint of humanity. These rapidly escalating situations require our attention, and that’s where ESG comes in.
Then you’ve got governance which relates to accountability and ownership. In a professionally managed business, you want a board of managers and CEOs who can run the organization effectively, give back to employees, and generate significant profits for various internal stakeholders.
When considering influence, invoking ESG compliance can percolate from company to company. If large companies or suppliers refuse to do business with small organizations because of a lack of compliance, it could be detrimental. But with government enforcement, one could push these organizations to be compliant and start a chain reaction of positively influencing the adoption of ESG initiatives. And with large companies like DLF or Hindustan Unilever, where there are numerous suppliers, the implementation of ESG will be mandatory for all of them – it is an inevitable outcome.
LE: Wonderfully explained. That offers clarity on the differences and the reverse pressure that can be formed to be ESG compliant. Does the pressure from governments benefit this effort?
That’s correct! Reverse pressure is exactly the situation that will arise if ESG is implemented through a regulatory body and if companies start incorporating it. Today, our government has set expectations for this kind of social reporting, so many companies like HDFC Limited, ICICI Prudential, and Yes Bank have already started adopting and reporting it. ESG is slowly becoming a reality! With governments acting on these implementations and the demands of the society, we’re definitely on the road to good.
LE: As ESG moves from paper to action, how is the government acting as an implementation driver?
In our research, we’ve found that the UN started global initiatives several years ago – inviting international organizations and individuals to partake in sustainable missions. These steps to curb climate change, carbon footprints, and move towards environment consciousness resulted in tremendous benefits. In 2011 in India, MCA developed national voluntary guidelines or the EEG to manage these social, environmental, and economic principles that businesses should be adopting. The EEG provided the framework for the business responsibility report or BRR. This report came into existence because the government believed – and rightly so – that business should be involved in the revitalization of society. The BRR contained 9 principles that determined the intersections between business and society, how they should be managed, and policies they were liable to uphold.
In 2019, SEBI developed NBGRC, guiding principles focused on business and human rights raised by the UN. More recently, SEBI added business responsibilities and sustainability reporting to determine the impact of businesses on the environment and society. This initiative began with 100 companies and now has over 1000 companies reporting these stats.
In everything we’ve studied so far, it was interesting to find these companies reporting against the three ESG criteria. These reports add transparency for both internal and external stakeholders and affect the rating of these companies – which, I think, in turn, will aid in generating more responsibility and accountability. It prompts consumers to question the ethical background of these companies and influence their path towards sustainable initiatives.
Take, for example, if a large auto manufacturing company doesn’t follow ESG, many of their clientele might choose to steer away from their goods or services. When companies take note of this decline in their business, it might encourage them to initiate ESG reporting and policies.
While there is still a lot to be done, it’s heartening to see how far we’ve come and the direction in which India is heading.
LE: That’s true, Rajesh. Now while understanding whether a company is ESG compliant will be a matter of checking their label say for an FMCG, but when it comes to service-related companies, like the Legal Industry, how does one evaluate the ESG compliance?
Firstly, law firms can set organizations on the right path towards ESG by helping them align with requirements, executions, and various outcomes for ESG and their business. They can elevate the need for ESG and its implementation, and in turn, create value and profit for themselves.
Secondly, it is imperative for legal agencies to follow ESG standards to retain their clientele. Within our industry, we contribute detrimentally to our environment. For example, our printing enterprises encompass a large carbon footprint. This needs to change by going digital. Similarly, our clients will look to us to comply with other policies as well. Our responsibility is to promote ESG to our clients and impart the necessary knowledge to execute ESG properly. Promoting and implementing ESG will be critical to the survival of businesses – including legal firms.
Considering these facts, law firms who are ESG compliant (or not) will be easily identified by the clients they serve, their associations with these other businesses, and how they choose to run their enterprise.
LE: So, this goes back to the fundamentals of success and how businesses can survive, correct?
I think the difference now is that we will be monitored, and accommodating ESG principles will no longer be an option – unless we want to be out of business. It is imperative to invest in the policies now rather than pay a heavier price later. Right now, we’re talking about ESG but take into account IT compliance or ethical compliance. Without the right tech or policies in place, very few investors or clients will want to do business with you. Much like having these foundational segments in place is necessary for success, ESG will eventually fit into this bracket.
LE: In an article in the Financial Express, you mentioned that the younger generation is far more receptive and conscious as a society. Would you mind telling us how or why that is? How are things changing for the better?
That is absolutely true! Millennials, GenZ – are very socially and environmentally conscious. They do not tolerate wastefulness or activities that adversely harm the environment, like the shift from plastic to glass bottles, motor vehicles to cycling, or even avoiding firecrackers on Diwali.
In my very home, my daughters are constantly educating me on the benefits of environmentally friendly products or methods of sustainable living. If young children can adjust their lifestyles for the welfare of our environment, it is only a matter of time before they carry these virtues into their offices or businesses.
And all this will change the nature of industries – legal and otherwise – and how they operate. It is simply a matter of having alternatives. With an option to do better, who would choose anything else? Additionally, changing tracks towards more sustainable avenues doesn’t reduce the need for labor or business. It just means that the requirements or production needs have changed to generate a new outcome with increased transparency.
LE: Government regulations can be hard or soft. Are the hard regulations affecting businesses or industries negatively?
Honestly, these regulations or policies are tailored for each industry and its specific requirements. So, a balance between soft and hard regulations is necessary and present, and it depends on how businesses choose to approach and implement them. For example, financial institutions under ESG compliances will be heavily impacted. Suppose the government incentivizes the banking industry towards being fully compliant with ESG. In that case, the banks will, in turn, reduce rates of interest or give larger benefits to businesses that follow the same policies. But in order to get to this point, mature thinking and research are required. Even for the government itself, it’s crucial for them to consider how they manage and are accountable to the public and independent courts of law. It is also important for the government to improve how they conduct their inspections or carry out these legal policies.
In this context, monitoring becomes a dominant method of keeping things aligned and on track. For example, even though child labor is banned, only close monitoring of factories and institutions can improve the authenticity of the policies and reports that are being churned out.
LE: Would you say this balancing act is crucial so that ESG doesn’t become a flourishing ground for litigation and the intention isn’t lost?
I think it’s a matter of complying or paying the price – literally – of being non-compliant. Transparency is of the utmost importance here. You cannot just demand money for a charitable but explaining the need for it, how it will be executed, and the consequences of not complying will help assimilate businesses with ESG compliance.
LE: This has been extremely insightful, Rajesh. Is there anything else you would like our readers to know?
Only that at this juncture everyone is in the process of learning and gathering the right resources and information. ESG is a holistic concept that requires the right capabilities for thorough implementation and out-of-the-box thinking to assess impact and requirements properly, augment current policies, etc. Mindsets are in the process of changing as well, but it is a slow and steady journey towards ESG because not everyone is ready or has the means to push forward. There won’t be any direct answer to many questions, there’s a big gap to bridge and a path with many obstacles to overcome. Building awareness, conducting workshops, regular, methodical, and steady implementations are the way forward. I hope for the best outcome, whether it happens in our lifetime or the next.