The philosophy of stakeholder capitalism in the western corporate world, which appeared during the 1950s and 1960s, is now staging a comeback in a new bigger and more modern avatar. It is now intricately linked to environmental social and governance (ESG) issues, with a focus on protecting the climate, ensuring diversity in the workplace, and safeguarding human rights.

Stakeholder capitalism as opposed to shareholder capitalism believes that companies have a far bigger obligation to society than just simply supplying higher returns to their shareholders. It urges companies to be mindful of, and responsive to, their impact on society and the environment—the importance of creating long-term value without putting the environment at risk.

For companies, it means creating secure jobs for employees, embracing sustainable practices in their different processes, putting customers first, cultivating long-term supplier relationships, paying fair taxes, and working diligently to minimize the environmental footprint of its operations. But more importantly, ESG policies have become an investment strategy to attract more specialised investors, which are seeking a purpose-led organisation and those helping to protect the planet for future generations.

ESG investing requires balancing environmental, social and governance factors—the non-financial parameters– with financial factors while making investment decisions. Discerning Investors today are increasingly scrutinising non-financial parameters as part of their analysis process to find climate risks and growth opportunities.

The Securities and Exchange Board of India (SEBI), the market regulator, introduced ESG reporting way back in 2012 and mandated that the top 100 listed companies by market capitalisation file a Business Responsibility Report. It made it mandatory for the top 500 listed companies in 2015. And in May 2021, the top 1000 listed companies had to report their sustainability performance to maintain transparency with stakeholders.

The market regulator also introduced a more detailed sustainability reporting structure under the Business Responsibility and Sustainability Report (BRSR), which put the focus on quantifiable metrics. It also seeks disclosures from listed entities on their performance against nine principles of the ‘National Guidelines on Responsible Business Conduct’. Reporting.

However, it raised a pertinent question. Do Indian companies implement what they promise in their annual reports or their speeches on the ESG practice? Many critics have pointed out the great divergence between what is being said and those being implemented on the ground.

For a definitive answer, the Reserve Bank of India carried out a study titled “Do Indian Companies Walk the Talk on ESG,” in its latest Report on Currency and Finance 2022-23: Towards A Greener Cleaner India.  The evolving ESG focus of Indian companies was examined by analysing the annual reports of 50 large-cap companies since 2012-13, they were mostly part of the NIFTY-50 index.

The RBI study revealed that the average ESG scores of Indian companies have improved over the last decade, especially for the environmental and social pillars, while the score for the governance pillar has fluctuated. The rise in the share of ESG-related words in the companies’ annual reports also had a direct relationship with the encouraging trend of improvement in performance-based metrics.

Again, the report showed that firms placing greater emphasis on ESG in their communications also tend to be better ESG performers. An analysis of the ESG scores for Indian companies in major sectors reveals that information technology (IT) companies expectedly had the highest average ESG scores, while transport infrastructure companies have the lowest scores.

The study also revealed that firms with higher market capitalisation have higher ESG scores. When the sample is reduced to include only large firms, the relationship between market capitalisation and ESG score becomes even more prominent. “This shows that a firm’s growth and perceived valuation by the investors is inherently correlated with its performance on the ESG parameters,” says the report.

A superior performance on the ESG parameters is a reflection that the firm can minimise its risks on the ESG front, enabling it to grow and get rewarded by the investors. Again, a large company with greater resources can improve its ESG performance and make investments that mitigate risk from ESG-related events.

Thus, there are many benefits to ESG reporting, including the ability to find and manage risks, build trust and transparency with investors and stakeholders, and attract more sustainable investors.