Sankar Chakraborti, Chairman, ESGrisk.ai and Group CEO, Acuité

What factors, do you think can cause the ESG ranking of a company to be high, despite the presence of real corporate governance issues?

A robust ESG Assessment framework should not only highlight ESG risks of a company but also measure how the companies are managing those risks. For ESG risk assessment, while one needs to look at the Environment (E), Social (S) and Governance (G) considerations of a company, the relevance of E, S and G varies across industries. At ESGRisk.ai, we therefore follow a multi-dimensional approach of assigning industry specific weightage of E, S and G based on the nature of operations of each industry.  So if a company from mining industry where environment and social categories have higher relevance, is not complying with a few governance parameters but it is taking several initiatives on the environment and social front, may score higher. However, such non-compliance governance parameters should be factored in the framework to raise caveats.

What are ESG rating entities like yours doing to see beyond the greenwashing done by companies?

It is imperative that we follow a comprehensive approach while measuring a company’s ESG performance right from framing policies, taking initiatives, setting targets and measuring their progress. It is crucial to analyse what the company is doing beyond just ticking the boxes. To cite an example, at ESGRisk.ai, while analysing the performance of a company, we first examine if the company has implemented a policy to mitigate its GHG emissions. Further to this, we scrutinize whether it has set targets to reduce its carbon footprint and finally to understand the improvement made, measuring the year-on-year progress achieved on the set targets.

Do you think ESG score/ranking alone is sufficient to understand a company's corporate governance performance?

A composite level ESG score is a reflection of the company’s ESG risk management framework. It is a result of the company’s performance in all 3 categories. In order to understand E or S or G, a detailed ground up assessment is important, and ESGRisk.ai’s framework allows for such detailed assessment through our comprehensive taxonomy comprising of 1000 indicators. However, to understand the corporate governance performance of a company, it is crucial to evaluate it on various aspects such as comparing the company's performance against the previous year and to benchmark it against the industry leaders in order to get an overall picture and not merely analyse the current year’s performance in isolation. Furthermore, constantly monitoring whether a company has been involved in controversies, and if so, what remedial measures have been adopted is another facet that holds primary importance. In conclusion, solely interpreting the governance performance through the ESG scores or ranking isn’t adequate.

SEBI and other regulators are stepping up focus on the 'real impact' of ESG investing. Do you think their initiatives will be effective?

We have witnessed companies misusing the ESG label for improper financial gains. However, as the market matures, regulators have caught on to these practices and are adopting measures to ensure transparency & accountability. These stringent approaches followed by the regulators are promising as they look deeper into the initiatives taken by the corporates, through the means of assurance statements & ESG Ratings. Increasing push from lenders and investors on higher disclosures & auditing requirements also help in reducing the ambiguities in ESG investing. All these, if implemented correctly, can aid in effectively reducing greenwashing and help increase transparency in ESG investing.

Proposals such as proper assurance of ESG disclosures are in the pipeline. Is this practice effective globally? What are the ways to implement this successfully?

Going forward, we believe, it is imperative that companies undergo ESG audits in the form of assurance statements from independent third parties to build and strengthen stakeholder confidence. In a short span of time, the number of global companies obtaining independent assurance on their environmental, social and governance (ESG) information increased from 51% to 58% in 2020, compared to the previous year, according to data from the International Federation of Accountants (IFAC), American Institute of CPAs (AICPA) and Chartered Institute of Management Accountants (CIMA). In India itself, for FY24, SEBI, in a phased manner, has suggested to make reasonable assurance for BRSR Core indicators mandatory for top 250 companies and for top 500 companies from 2024-25 and top 1,000 from 2025-26. The regulatory push will generate the momentum needed to build investor confidence.

How can investors ensure they are investing in high-quality companies not just on future prospects, but also on ESG parameters?

ESG Ratings provides a very effective tool in the hands of the investors. ESG ratings measures a company's exposure to long-term environmental, social, and governance risks. These risks have a financial impact but are often not highlighted during traditional financial reviews. When ESG ratings are complemented by financial analysis, investors can gain a thorough understanding of a company's long-term prospects. ESGRisk.ai’s assessment report is designed to help investors understand companies’ ESG risk susceptibility & risk management framework, enabling investors to directly integrate ESG factors into their portfolio construction and management.

Promises of becoming net zero have fallen short so far, as far as execution is concerned. How can this issue be addressed?

Achieving net-zero for the country will require a collaborative effort with the corporates being the backbone of the Indian economy. The process should begin at an elementary level where companies are not only required to start monitoring, measuring and disclosing GHG emissions but should also set science-based targets as a first step towards decarbonization. For achieving net-zero for a country like India, which is extensively dependant on coal, lacks expertise to build cleaner technologies, some regulatory actions coupled with incentives in the form of tax benefits will ease the shift towards disclosures of the business’ short and long-term carbon reduction targets and the actions they are taking to achieve them thus encouraging Indian businesses to achieve net zero by 2070.

The government recently finalized 13 activities for trading of carbon credits. What is your view on this move?

It is a laudable move on the part of the Indian Government to finalize 13 activities for carbon trading. The Government has essentially outlined a long-term policy outlook and has welcomed investment in particular technologies and activities. Carbon markets offer a viable solution to companies who struggle organically to reduce their net emissions and support green initiatives. This initiative will allow companies to meet sustainability objectives while also funding carbon reduction and capture projects, boosting capital flow to such critical initiatives. Consequently, India will receive investments in high-tech fields where it has limited expertise. Additionally, with the assured carbon revenue, it will encourage investors and businesses to invest in promoting these low-carbon technologies.