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ESG Imperatives: Redefining Corporate Governance and Risk Management in Boards

The design of the concept

ESG (Environmental, Social and Governance) now the most talked about in banking and business circles may appear to be an old wine in a new bottle, a concept evolving fast in corporate and even in government circles with a refined and consolidated package of social consciousness. ESG is too critical to ignore in the days to come.

Although this has been in operation in various other formats quite sometime in the past, the pace of momentum and new focus being witnessed today with enhanced attention deserve recognition. These three crucial factors ESG have been taken into cognizance by the corporate captains, more so by financial institutions, and thus making their way straight to the boardroom agenda is indeed laudable. These three ESG decisive factors are fast emerging as a popular mode to evaluate the effectiveness of any organisation which investors would prefer to look into with optimism. How are Asia Pacific (APAC) countries proposing to adapt the new paradigm of the ESG concept? Disclosures and reporting are a moot question going around in business circles. The redeeming factor is that in many regions like Singapore and Hong Kong, new taxonomies and working groups are seriously working on this concept to ensure that the market participants suitably abide by a common goal with a homogenous rule-book to suitably account for ESG norms so as to make sure that the same settles down and aligns conveniently with the broad stakeholders' expectations. While the need for sustainability disclosures seems to be addressed by most jurisdictions in Southeast Asia, Singapore and the Philippines are by far the only countries in the region that have moved ahead with incorporating environmental and social risk into their supervisory expectations for banks' risk management systems.

An evolving framework

A comprehensive framework for this evolving regulatory landscape in the APAC region and related technology, data sourcing, and analytics solutions that offer exemplary support to corporates and financial services' firms is to be designed in consultation with the stakeholders without any let-up and put on track. ESG scoring, ratings, and periodic evaluation coupled with objective feedback would enhance the efficacy of the module. These should be blended with the corporate vision and mission narratives, and the board may ensure to solemnly place them on the dash board of corporate governance with a noble intent to see that they percolates to all levels of the hierarchy.

Any business is fraught with innumerable risks like operational, regulatory, reputational, credit, liquidity, market, interest rate, exchange rate, political, et al. Ignoring ESG factors like climate change will eventually lead to unpredictable social and economic risks impacting the basic viability of the financial sector per se. While the risk assessment-tasked assurance companies have traditionally followed up on the risk factors to a certain extent, ESG risk management is perhaps new and alien to them.

ESG criteria are a set of benchmark standards for any organisation towards its operations, and the community's welfare conscious stakeholders reckon these before establishing a long-term relationship with the said organisation, including the investors at large. The underlining impetus of such a move on the environment is to evaluate the focus and seriousness with which the company or firm is operating with a large perspective of protecting the natural environment. The concern for social criteria is to assess how it performs its crucial role in sustaining and enhancing the relationship with its suppliers, employees, customers, shareholders, investors, and the public at large. Thirdly, the governance factor would encompass the efficacy of the boardroom functions, shareholders' wealth maximisation, executive perks, leadership, audits, internal controls, regulatory compliance, clients' grievance mechanisms, etc.

Today, it becomes inevitable for any business organisation, be it in industrial production or services like IT., banking, and insurance, as well as all the regulators, to be aware of the nuances and implications of ESG norms and set standard goals with a view to combating the emerging risks. Interestingly, investors and other stockholders weigh down the risks of non-compliance with ESG norms. It is the right time for financial institutions, including commercial and development banks, to adhere to ESG norms driven by the boardrooms for their sustainability and growth, and more so, to insist all their corporate clients to meticulously pursue benchmark standards of ESG in all their operational domains. Many fund managers, both domestic and overseas, brokerage houses, and robo advisers now prefer to choose financial and other products based on their compliance with ESG norms. Investors perceive companies with scant regard for ESG as potential risky investments and prefer to stay away from them. It is rather interesting to learn from a recent survey that young investors have demonstrated their concern for ESG factors and prefer to invest only in companies that pay greater attention to ESG. To add to the evolving trend, mutual funds and broking houses have begun to offer ETFs (exchange-traded funds), and other funds like CP, CD, pension funds, PEs, etc. show more interest in ESG complaint companies.

This ESG initiative will incidentally help in building their brand image, leading to attracting a new pool of constituents both firms and retail segments as this message will percolate to all of them and be received with aplomb. A new set of clients would come forward to align themselves with such ESG compliant organisations.

Our commitment to ESG mirrors our commitment to the world.
- Evan Harvey, Global Head of Sustainability, NASDAQ

Concern for the planet

Human beings, with their insatiable thirst and unabated greed for more wealth creation, have conveniently ignored the value of natural resources available on the planet and the huge damage inflicted on the planet by humans, adversely impacting the climate equilibrium and the resultant consequences like tectonic plate changes and puncturing the 'ozone layer' owing to accelerating the global warming dangers for humans, animals, birds, and other natural inhabitants on this planet. This has been studied in depth by the UN, which remains a worried lot these days, as evidenced by the remarks of U.N. Secretary General Antonio Guterres's remarks," The alarming report (of huge climate disruption) must sound a death knell for coal and fossil fuels before they destroy our planet," thereby emphatically driving home the urgent need for countries to pay the desired attention to address the issue and bring it under manageable levels.

ESG has always been the core of any business we are involved in
- Sandro Salsano, President, Salsano Group

While countries are vying with one another to invest in other areas like health, defense, infrastructure, information technology, space, etc. out of necessity, the total neglect of ESG parameters can never be accepted and compromised. Recently, Japan was the first among the G7 countries to use its huge foreign reserves in ESG bonds with a view to ramping up its efforts to combat climate change, and no doubt, the rest of them would follow soon on the same lines. Singapore and the Philippines are by far the only countries in the region that have moved ahead with incorporating environmental and social risk into their supervisory expectations for banks' risk management systems.

So it has become essential to ensure sustainable, responsible, impactful, and socially relevant investing in ESG projects has to be undertaken by all countries, small or big, rich or poor, without any loss of further time. A redeeming fact is that the demand for ESG investments has increased since 2000, as per recent reports. Organisations need to have a committed team at senior levels to constantly monitor energy use, waste, pollution, natural resource conservation, and treatment of the environment, forests, and all species like animals, birds, et al. Even individuals, starting with children, should be made aware of the need to consciously conserve and protect them without any let-up by explicitly elucidating the impending risk factors and the cost society has to pay over the years. The land, river, and even the sea get contaminated due to the constant discharge of hazardous and toxic chemicals and electronic and pharmaceutical/hospital waste materials. Even some of the neighbouring countries are mercilessly and surreptitiously dumping them on our soil tons and tons through their shipments. This needs the attention of port authorities and the local governments, and sanctions should be imposed on such countries.

Regarding enhancing social values, it is imperative that companies availing themselves of the rich local resources both human and other materials come voluntarily, leave alone the statutory CSR commitments, and be change agents in the area by providing employment, schools and hospitals, drinking water, and hygiene facilities, thus embedding their growth and development in sync with the transformation of the people and the locality per se.

Today, it becomes inevitable for any business organisation, be it in industrial production or services like IT, banking, and insurance, as well as all the regulators, to be aware of the nuances and implications of ESG.

If we take governance factors in the context of ESG, investors consciously prefer to assess and constantly evaluate a company on its ethical standards, transparency in accounting and in all its processes, regulatory compliance, stockholders freedom to voice their suggestions and grievances, if any, board members' performance sans conflict of interests, devoid of any political clout and influence, not expecting any undue favours to themselves as well as their relatives and friends, respect for the law of the land, total data protection and privacy, and the list is endless. Of course, no single company would pass through all these rigorous norms, but the underlining impetus could be credible and professional management at the top echelons of a company with their eyes and ears open, keeping their antenna high with alert mechanisms. The 'whistle-blower' mechanism, if it is in place in the organisation, would facilitate the identification of hidden challenges in areas of implementation of ESG parameters.

ESG firms would draw a growth plan in consultation with the prime stakeholders, enshrined with the utmost faith and trust in their managerial personnel and the various tiers of functions, constantly reviewing and guiding them, taking the risk factors on the path and a top-to-bottom and vice versa communication in place, and keeping the priorities on the dash board to track the pace, trend, and direction of the progress. It is prudent for companies with on-going, long-term projects and revolving tender methods of allocating the works, like the Indian Railways, to use ESG factors to identify and decide before sanctioning the contracts. To give a practical illustration, Boston-based Trillium Asset Management, with $2.8 billion under management as of March 2020, extensively and meticulously deployed ESG factors to help identify the right firm for awarding their contracts. It went one step ahead and avoided firms with substantial exposure to coal mining, nuclear power, and weapons-producing units; those with workplace discrimination—racial or otherwise; cruelty to animals; and those with no initiative for green and alternate sources of energy supply. Companies abroad will soon come under the scanner of an agency that constantly monitors their ESG progress, and a grading will be published with the twin objectives of letting the company concerned know their status and the need to focus on and improve it, and for the investors to decide based on the scores. This qualitative evaluation technique should emerge in the Indian scenario too, soon. This would no doubt enhance the credibility of the firms and boost their market share, and eventually their revenue, bottom line, share price, and finally their stock price. The meticulous, unbiased, and systematic application of ESG parameters would evidently weed out the bad elements from the mushroom presence of competing companies and substantially reduce the risk factors associated with this. In corporate circles, even today, the unfortunate and dreaded events of BP's 2010 oil spill and Volkswagen's emissions scandal rocked the company's stocks in bourses, leading to huge losses to investors at large.

Sachs are seamlessly reviewing their ESG approaches and periodically publishing reports. If such an exercise were undertaken in India, scams and incidents due to failed corporate governance would have been detected early and the resultant agony could have been averted, saving the hard-earned money of both small and big investors, and the IBC kitty would also have been with much less 'toxic debts'. Interestingly, SEBI in India has initiated the momentum in this direction by issuing new guidelines for ESG funds in India. Regulators want to increasingly ensure financial institutions prove that their green-labeled products really are green. Regulators across the region are introducing taxonomies exactly for this purpose. All financial service providers will need to show that their products are aligned with these taxonomies.

Society gives us a license to operate: it's a question of whether society trusts you or not.
- Alex Gorsky, CEO, J & J


Prof. B. Venkateswaran

Prof. B. Venkateswaran

He currently serves as a Professor at Ramakrishna Mission-Vivekananda College, Chennai. Before that, he was a Professor of Finance at Pondicherry University at Loyola College, Chennai where he taught Banking & Finance. Previously, he served at the Bank of Baroda and Lakshmi Vilas Bank and sought voluntary retirement during his time as the Asst. General Manager. He has previously worked as Chief Faculty at BobRTC, as well as the Dean (Academics) of Rai Business School, Chennai. He regularly writes for the Business Standard, Businessline, Economic Times, and Financial Express commenting on themes of Banking, Finance, Investment, Foreign Exchange, etc.

Owned by: Institute of Directors, India

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