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Most Indian cos are struggling with ESG performance despite good show overall

The uptake of sustainability in decision making is very piecemeal in India Inc because of a lack of stewardship, and fiduciary persuasion to improve the ESG quotient.Premium
The uptake of sustainability in decision making is very piecemeal in India Inc because of a lack of stewardship, and fiduciary persuasion to improve the ESG quotient.

  • In general, the performance of companies on the environmental parameter was weaker compared with social and governance. The average environmental score across our coverage was 45, compared with 50 for social and ‘66’ for governance

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Many Indian companies continue to struggle in the environmental, social, and governance (ESG) space, although there is marked improvement in the corporate space. According to Crisil’s ESG risk assessment of 586 Indian companies for fiscal 2022, only 14 were placed in the leadership category, with 73 in the ‘below average’ and ‘weak’ categories.

Around 108 companies were in the ‘strong’ category, the report showed.

The risk assessment done among 586 companies across 53 sectors, based on fiscal 2021 data, indicated an improvement in the ESG scores of a majority of them compared with the previous year, driven by better disclosures and improved performance on various parameters.

“This is visible especially in renewable energy consumption, gender diversity and board independence," it said.

On comparing the same set of 225 companies analysed last year, 14 showed a significant positive deviation (more than 5-point increase in score) and three a notable negative deviation (more than 5-point decline in score). As many as 199 were relatively stable.

Amish Mehta, Managing Director and CEO, Crisil, said, “Leaders on ESG have demonstrated a clear commitment towards sustainability, and have consistently delivered superior performance. In contrast, those in the ‘weak’ and ‘below-average’ categories have poor disclosures and inadequate ESG risk-management practices.“

“The uptake of sustainability in decision making is very piecemeal in India Inc because of a lack of stewardship, and fiduciary persuasion to improve the ESG quotient. For ESG to truly be embedded and practiced in spirit, all stakeholders have to work collaboratively and create a favourable environment for ESG in India. In addition to focusing in the near-term on targeted actions such as decarbonisation, a mindset shift is necessary to transform from merely complying to creating value and structurally mitigating risk," he said.

In general, the performance of companies on the environmental parameter was weaker compared with social and governance. The average environmental score across our coverage was 45, compared with 50 for social and ‘66’ for governance.

The survey showed that in India, only 1 in 5 companies reported their scope 1 and scope 2 GHG (green house gas) emissions. The disclosure on scope 3 emissions was even worse as only 63 out of 586 companies published the data.

Scope 1 emissions are direct emissions from owned or controlled sources, while scope 2 emissions are indirect emissions from the generation of purchased energy. Further scope 3 emissions include all other emissions emerging from activities in the organisation’s value chain.

On social aspects, public sector undertakings (PSUs) fared relatively better with an average score of 55 compared with 49 for private companies. They were better on key parameters such as gender diversity (15.3% for PSUs versus 12.7% for private companies), attrition (2% for PSUs and 22% for private), and pay disparity (CEO to median employee pay ratio of 4.8x for PSUs against 137x for private).

In governance practices, however, PSUs lagged private companies, especially in board composition and functioning.

Despite a 2 times increase in the past one year, the share of independent directors at 40% for PSUs was much lower compared with 51% for private companies. Similarly, while 41 companies had lead independent directors, none was a PSU.

Further, women directors constituted 19% of private company boards, while for PSUs it was just 13%.

Suresh Krishnamurthy, Senior Director, CRISIL Research said: “Governance remains the cornerstone of not just ESG, but overall corporate performance. This is amply clear from the fact that the absolute operating profit of the top 10 companies on the ‘G’ parameter saw a 23% compound annual growth rate (CAGR) between fiscals 2019 and 2021, whereas that of the bottom 10 logged a negative 7% CAGR. The top 10 ‘G’ scorers also outperformed their respective industry operating profit growth by a solid 900 basis points (bps).“

As many as 6 out of 10 companies outdid their respective industries in governance. Conversely, the bottom 10 scorers in governance aspect underperformed by a negative 1,200 bps, with 7 out of 10 companies underperforming their respective industries, Krishnamurthy said.

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