The COVID-19 pandemic has affected every facet of the lives of people of this planet and at the same time brought to the fore many shortcomings in our economic, social and governance systems that seek immediate attention. As a result of the pandemic there has also been a huge impact on #ESG #investing globally and investors are now more aware of their role in mitigating issues like climate change and social inequality. The Securities and Exchange Board of India has mandated #ESGreporting by certain companies in the country starting from the next financial year. While this article is essentially about the new ESG reporting regime in India, it does not delve deep into the reporting framework and requirements as such, it rather explores as to what extent the new regulatory developments in this area are attributable to the recent global #COVID-19 crisis.
Mandatory ESG Reporting in India
The Securities and Exchange Board of India (#SEBI) in its circular dated 10th May 2021 has mandated Business Responsibility and Sustainability Report (#BRSR). Starting from the current financial year 2022-23 companies are expected to voluntarily disclose their Environmental, Social and Governance (ESG) performance through the new framework provided by the National Guidelines on Responsible Business Conduct (#NGRBC) issued by MCA in 2019. From the next financial year 2023-24 onwards this ESG reporting will be mandatory for the top 1000 listed Indian companies based on market capitalisation. The BRSR has three main components, viz., a) General Disclosure, b) Management and Process disclosure and c) Principle-wise performance disclosure through Key Performance Indicators (#KPIs).
The role of COVID-19 as a catalyst for ESG
During the COVID-19 pandemic the world economy was hit by lockdowns resulting in shutdown of businesses and operations. There is no doubt that the pandemic has brought about the greatest global recession since the Second World War, from the point of view of investors it was also seen as a ‘sustainability crisis’. It brought about renewed concern for issues like environment and climate change. This has awakened the decision makers from their slumber and made them prioritize a more sustainable approach to business. Globally it is being increasingly felt that this pandemic can truly become a catalyst for #ESGinvesting.
Before the pandemic began, sustainability was already on its way to the mainstream business decision making. Asset managers around the world were already prioritising the integration of environmental, social and governance (ESG) considerations into their investment solutions. The 26th version of the United Nations #ClimateChange Conference (commonly referred to as #COP26) was scheduled to be held in 2020. It was delayed by a year and finally took place in Glasgow, Scotland from 31st October 2021 to 13th November 2021. Since many such climate change initiatives were postponed or cancelled, sustainability in investing approaches was delayed by at least a year. However, the pandemic impacted the environmental, social and governance factors in the following way:
1. Environmental factors
Despite the short-term deferment of many important environmental issues, during the pandemic, there were many environmental gains that reminded investors once again about the importance of environmental sustainability. Worldwide lockdowns resulted in millions of people starting to work from home. As a result of commuting to work place reducing substantially, fuel consumption in vehicles as well as coal consumption for energy generation in offices came down drastically. There was a huge reduction in global pollution.
2. Social factors
The pandemic opened a Pandora box of social issues that need addressing. Some examples are gross inequality between those who have the ability to work from home and whose children can access online education and those who cannot, between those having access to good healthcare facilities and those who don’t, between migrant workers and those who have the luxury of living and working in their own homes and so on. The pandemic increased the inequality in the society and hit the poorer countries very hard. These social factors are, in the long run, likely to increase the inequalities in society and lead to increase in labour cost; this in turn will impact the corporate profitability and delay the post-pandemic economic recovery.
3. Governance factors
The pandemic brought forward the importance of good governance. The importance of reorganising the value chains and methods of interacting with employees and customers, given the sudden and unforeseen loss of income in many sectors, has been brought to the fore. Experience has shown that the companies with best governance have fared better during the pandemic. This implies that going forward the Boards of companies will need to focus on the organisation’s long-term sustainability. Boards have to find the optimum balance between shareholder perks and other stakeholders’ rights so that dividend pay-outs do not jeopardise the maintenance of sufficient cash balance in the organisation.
From the above discussion we can see that the COVID-19 pandemic has brought to fore the fact that for long term growth and sustainability it is important for organisations to lay emphasis on material environmental (E), social (S) and governance (G) factors. All the three factors, E, S and G have been largely impacted by this global crisis. The pandemic delayed many important policy initiatives in this area. Initially there was temporary shifting of the ESG concerns by governments for focusing on immediate disaster control instead. But as governments are gradually recovering from the effects of this global crisis, focus is now shifting towards speeding up of the #ESGagenda worldwide. We as a country are also catching up with the global realisation.
Every problem brings along opportunities which need to be properly explored in the right direction. The COVID-19 crisis may have temporarily delayed many important agendas and initiatives, but it has brought with it many seeds of opportunities that have to be rightly sowed in order to reap the best results. While for governments this is a great opportunity to make regulations providing for #ESGcompliances, for companies it is the time to focus on sustainability not just in letter but also in spirit and for investors this may even be the beginning of a paradigm shift towards sustainable investing for long term benefits.