SANJAY DESAI, CO-FOUNDER & REGIONAL DIRECTOR, HUMANA INTERNATIONAL GROUP
Is ESG a process cadence or an application tool? How should businesses get aligned to it?
ESG is a term used to represent an organisation's operational, business processes and financial efficiencies, focusing mainly on sustainable and ethical impacts to society and environment at large. Capital markets use ESG to evaluate organisations and determine future financial performance. While ethical, sustainable, and corporate governance are considered non-financial performance indicators, their role is to manage organisation’s impact, such as carbon footprint, GHG emissions and use of scares resources (esp. water).
Environmental factors are climate change, energy consumption and how much an organisation works to protect these resources and their impact on environment.
Social factors guide how an organisation treats their human capital, personal data protection & inculcate diversity and inclusion across the entire organisation physically.
Governance, as the word indicates, validates how organisations develop their corporate policies addressing internal checks & balances, transparency in reporting, integrity and ethics in their business transactions and dealings within and outside their organisations.
ESG has many different perspectives. You can look at it through a health and safety lens or a risk management lens or a reporting lens. On this note, I would like to echo a quote from the great leader, Mr. Mahatma Gandhi, “What we are doing to the forests of the world is but a mirror reflection of what we are doing to ourselves and to one another.”
For a long time, we heard about CSR. Are ESG and CSR the same or two different ends of the corporate philosophy?
ESG is a process tool that helps organisations to understand as to how they are managing the impact of their operations on environment / social cause / GHG emissions / CO2 disposition. This framework helps them to balance their financial investment v/s social and environmental impacts as well as gauge risk and opportunities in the future. ESG focuses on materials issue of an organisation.
CSR (Corporate Social Responsibility) is a form of self-regulation that reflects a business’s accountability and commitment to the well-being of communities and society through various environmental and social measures. It is a strong belief that CSR plays a crucial role in a company’s brand perception; attractiveness to customers, their investors, help retain talent and show overall business success. An organisation can implement four types of CSR efforts, viz., environmental initiatives, charity work, ethical labour practices and volunteer projects.
There are subtle differences, let us take a look at few of them…
What are the ESG metrics? Are they managed in the similar way as business metrics?
Interesting question… ESG metrics are indeed similar to business metrics in the way they decipher the data or both have similar quantitative and qualitative KPI formats. However, the outputs they track are different. ESG metrics are used to assess a company’s performance related to environmental, social, and governance issues, which, in turn, indicates whether an organisation is creating, reducing, or preserving the impacts to the environment, mankind, and resources. These metrics will include indicators such as GHG emissions intensity, amount of waste generated, and gender diversity in an organisation.
Traditionally investors were looking at financial metrics or financial outcomes to judge the performance & quality of an organisation. But it has changed in the recent past. Now most investors also consider ESG metrics alongside financial data to access the viability and long-term performance of organisation in a more sustainable’ way. Table below looks at a few metrics deeply…
What is a Carbon market and how can an organisation be a part of it?
In simplistic form, carbon markets are trading systems where carbon credits are sold and bought by many organisations/ institutions. Carbon markets are still in their infancy and currently lack quality and credibility; technology can help in promoting their transparency, integrity, and usage. While the carbon markets are considered as legitimate globally, they do have their own issues. For example, a question comes to mind, does the carbon credit create real-world decarbonisation, and would that carbon emission be (really) offset if the credit was not purchased? Hence organisations who buy carbon credits need to ensure carbon offsetting is only utilised for the part of emissions that cannot be abated. While claims and offset quality may vary, offsets are on the rise and there is a need for carbon credit markets to be vigilant, credible, and transparent. There are two types of Carbon markets:
Regulatory or Compliance market: This market is getting bigger and bigger each year for last few years. At present, the global market size could be in the vicinity of US$265-275 billion. According to World Bank, there are over 47 national jurisdictions representing more than 20% of global GHG emissions. At a ballpark, academics estimate the real price of GHG emissions to be around $200 per tonne CO2e. However, the actual cost will vary from country to country.
Voluntary carbon market: This market is much smaller, fragmented, largely private, with varying standards. It is estimated that the market size is from $400 million to US$2 billion. The cost of carbon credits varies, particularly for carbon offsets since the value is linked closely to the perceived quality of the issuing company. Typically, voluntary credits are purchased by private companies all over the globe who want to compensate for their carbon footprints, especially those corporations who have strict sustainability targets and net zero strategies.
Over the last few years, supply chain is on the sustainability media radar. Few new terms we hear are “Sustainable Supply Chain Finance”, what does this mean?
Over the last few years, supply chain has been in the limelight for many right or wrong reasons… As the term indicates, these are two processes combined (Sustainability and Supply Chain Finance). From a practical definition point of view, sustainable supply chain finance is defined as financial practices and techniques those support trade transactions, in a manner which will help to reduce negative impacts and create environmental, social, and economic benefits to all stakeholders involved in bringing products and services to markets.
Everyone is a winner in this process – The manufacturer, borrowers, lenders, consumers, and trade. Sustainable finance means investing money into organisations that demonstrate social values, good governance, and diversity & inclusion in their staff. It also means investing money in financial institutions / private funds managers who invest in their funds (lending) based on ESG principles.
Sustainability has rapidly become a core consideration in today’s corporate supply chain discussion, driven in large part by consumers and investors looking for more ethical manufacturing practices from the companies they buy from and invest in. Similarly on banking and trade finance front, having access to sustainable-labelled finance solutions is key for corporates to meet their ESG goals, whether it is reducing emissions or ensuring fair wages and working conditions among their suppliers.
While the above sounds very promising, please note these are purely corporate / Industrial or Institutional investors who have big pockets and are able to access the big data. For them more is merrier. For end consumers like us or small retail investors to openly embrace sustainable investments, the financial market needs to be much easily accessible & consistent with a personalised sustainability approach.
There is always room for improvement, given the advancement we have made on the technology spectrum. How are technology companies leveraging and leading the way in this global phenomenon?
Yes, data science and analytics will guide organisations to follow ESG principles to the core. Imagine that in the last turbulent three years, almost every industry suffered in some or the other way, but it is only technology industry, which remained relatively calm and resilient. They stood strong during the pandemic, many of them had double digit growth during 2021-22. In order to see their growth especially the tech start-ups who stand to benefit further with a renewed focus on ESG, one of the silver linings in an otherwise disastrous Covid-19 aftermath.
The technology industry is a significant contributor to the global carbon footprint, and almost 60% of IT industry emissions come from their hardware used by customers. This explains why these organisations are at the forefront of the corporate push for green energy globally. This also acts as a catalyst for other industries to invest & adopt similar technology and follow suit on their growth path. The big five tech companies (Amazon, Apple, Facebook, Google, and Microsoft) are all setting targets to use 100% renewable energy. Most of these industry players intend to be carbon-negative by as early as 2030.
In one example, datacentre providers in Singapore have had to be resourceful in their search for renewable energy, since the government has been critical of the industry’s large carbon footprint. In March 2021, solar energy provider Sunseap, which works with Microsoft and Apple’s datacentres in Singapore, unveiled a floating solar farm that could produce an estimated six-million-kilowatt hours of energy per year at 5MW peak installation. Industry participants are also discussing the expansion of datacentres powered by onsite generated hydrogen.