By Trisha Shreyashi
“Sustainability”: The overarching goal of all global, local and commercial organizations since the 2010s seems primarily ambitious in the financial sector. An extensive study assessing NSE 600 companies in FY 2020-21, done recently underscores BFSI as one of the sectors experiencing the highest ESG risks. (study by esgrisk.ai)
The decline in trade barriers has boosted production and income generation in the past two decades, given the wave of globalization and technological advent. The spiraling development-production-trade equation has put tremendous pressure on environmental resources. This has led to huge debates on tackling pollution amongst the developed and developing nations.
While businesses and corporations are congratulated on one front, they are critiqued on the flipside for allegedly contributing to environmental, social and governance (ESG) aspects.
ESG is a set of non-financial instruments measuring and evaluating the sustainability of investments. There has been rapid sensitization and increased awareness regarding climate change, corporate misconduct, and social inequality. This has led to corporate conduct and sustainability becoming major determinants of the reputation and success of business institutions.
The report suggests that the service sector has encountered a rise in controversies in contrast to the manufacturing sector. It places Banking, Finance, Securities & Insurance (BFSI) industry among the top controversial ESG management along with IT and consulting. It ranges from non-compliance with pollution control boards regulations to flouting environmental clearances, business ethics, employment safety practices, violation of insider trading rules, non-compliance with regulatory norms, and greenwashing.
However, the report brings to light the curious case of devising a sustainable ESG model for Indian banks. Given the confounding flood of information and speculations about future regulatory changes, it becomes difficult for institutions in BFSI to develop a comprehensive ESG strategy. The strategy would aim at tackling the ESG risks, otherwise known as sustainability risks focusing on the potential effect of stakeholders in an organization and vice-versa.
Environmental risks include physical risks (supply chain collapse, rise in sea level, droughts), and transition risks (legislative & regulatory, structural change in demand and supply). Social risks include non-compliance with labor standards and lack of product safety assurance. Governance risks include compliance lapses, corruption, issues in senior management, and data leaks. Thus, regulators, technology, market dynamics, and resources are major influencers of ESG development. It influences the environment, communities, markets, and future generations.
Zooming in on the BFSI sector, these aforementioned factors not only affect service providers but customers too. Changes in sales and production disruptions may lead to higher loan defaults. Some claim that the pandemic has induced a similar crisis which can be leveraged to better cope with future ESG risk challenges. Reduction in workforce given higher sickness rates, shutdowns, preference for remote-working, travel bans, network capacity issues, cyber risk, and IT security has led to operational risks. This has affected their goodwill and subsequent liquidity risks, given the withdrawal rate of deposits and decrease in banking services.
In light of the above discussion, it is pertinent for the investors to be informed of the ESG framework in India. First is the Corporate Social Responsibility (CSR) framework under the Companies Act 2013. Second is the proposition of a Social Stock Exchange of India. The third is the Business Responsibility and Sustainability Report (BRSR) which is to be mandatorily submitted by the top 1000 listed entities to SEBI from 2022 onwards.
The BRSR framework reporting was primarily voluntary for the top 1000 listed entities in the FY 2021 – 22. The BRSR framework has sought to amalgamate the financial performance of a listed entity with its ESG performance. It is pertinent to mention that the BRSR framework is a result of the ratification of the Paris agreement of 2015 and the Sustainable Development Goals (SDGs) 2030 announced by the United Nations (UN). It helps the regulators, investors, and other stakeholders in assessing and evaluating business stability, growth and sustainability on all fronts.
Prior to the introduction of BRSR, it was the Business Responsibility Report (BRR) that was applicable to these entities. However, BRR was mandatorily applicable only to the top 100 listed entities by market capitalization.
The BRSR report comprises three sections for disclosures; viz:- General disclosures, Management & Process disclosures, and Principles wise Performance disclosures. General disclosures prescribe details of the listed entity, products/services, operations, employees, holding, subsidiary, associate or joint venture companies, CSR details, and transparency compliances. Management and Process disclosures are sought to help entities demonstrate the structures, policies, and processes put in place towards adopting National Guidelines on Responsible Business Conduct. Principle-wise performance disclosures are sought under (i) essential determinants and (ii) leadership indicators.
Moreover, there is an increase in the number of Indian financial institutional signatories to the UN-Principles of Responsible Investment (UN-PRI). This only caters to the hope that the ESG issues shall be incorporated into investment analysis, ownership policies and decision-making process.
(Trisha Shreyashi is a lawyer and columnist. Views expressed are the author’s own.)