The Chairman of ITC recently drew attention to an important issue -- the transformation of Environmental, Social, and Governance (ESG) practices into non-tariff barriers. This raises concerns about the impact on businesses, particularly the challenges faced by companies of all sizes. To ensure a level playing field and foster sustainable growth, it is essential to establish a harmonised framework that is balanced, calibrated, and just for all stakeholders.
In recent years, Environmental, Social, and Governance (ESG) factors have gained significant traction in the corporate world. Companies across the globe are increasingly acknowledging the importance of ESG considerations in their operations and decision-making processes. More importantly, in India, the foreign investing community seek ESG measures in their investment criteria, and often use metrics and framework that are used in their home markets to evaluate Indian brands.
ESG factors encompass a broad range of considerations, including environmental sustainability, social impact, and corporate governance. It requires understanding and managing diverse aspects such as climate change, human rights, supply chain transparency, board diversity, and ethical business practices. The multidimensional nature of ESG makes it complex and requires a comprehensive approach. These aspects are crucial for ensuring responsible business practices, mitigating risks, and fostering long-term value creation. However, the issue lies in the inconsistent and often arbitrary standards that have emerged across different jurisdictions and industries.
Large Indian corporates, with their global presence and complex operations, find themselves grappling with a multitude of ESG regulations, certifications, and reporting requirements, each with varying thresholds and expectations. Developed nations deploy non-tariff barriers as a strategy to control the level of trade they conduct with other countries. While the intent behind promoting ESG practices is commendable, it is becoming evident that the implementation of ESG standards has inadvertently transformed into a non-tariff barrier, particularly for large corporates.
Non-tariff Barrier Rationale
One argument supporting the notion of ESG as a non-tariff barrier is the inconsistency and lack of harmonisation across jurisdictions. ESG regulations, reporting standards, and metrics differ across countries, making it difficult for companies to navigate the landscape and meet various requirements. This lack of harmonisation places an additional burden on businesses, especially those operating in multiple jurisdictions, as they need to comply with a myriad of frameworks and guidelines. This disparity can be seen as a non-tariff barrier, as it creates complexities and additional costs for businesses to adhere to different ESG expectations.
The burden imposed by these diverse and ever-expanding ESG frameworks poses challenges for large corporates on several fronts. Firstly, compliance becomes a herculean task, consuming valuable time, resources, and expertise. Companies are forced to navigate through a labyrinth of regulations, often diverting their focus and diluting their core business objectives. This diversion of resources not only hampers operational efficiency but also impedes innovation and growth.
Secondly, the cost associated with ESG compliance can be disproportionately higher for large corporates compared to their smaller counterparts. While well-established conglomerates may have the financial resources to allocate towards ESG initiatives, the same cannot be said for smaller companies or startups. This creates an uneven playing field, inadvertently favouring smaller players who are exempt from more stringent ESG requirements.
Moreover, the lack of harmonisation in ESG standards across jurisdictions adds to the complexity. Companies operating globally face the challenge of adhering to a patchwork of regulations that differ not only in substance but also in reporting methodologies. This lack of standardisation not only increases compliance costs but also hampers comparability and transparency, making it difficult for stakeholders to assess and compare the ESG performance of companies across borders.
Countries and regions have distinct social, economic, and environmental contexts. Different countries possess varying levels of ESG maturity and regulatory frameworks. Imposing a standardised ESG framework may overlook these contextual variations and fail to account for the specific challenges and priorities of each jurisdiction. A framework designed for one country may not align with the realities and needs of another, leading to ineffective or impractical implementation.
Different industries have unique environmental and social impacts, as well as governance requirements. For example, the ESG concerns of a manufacturing company will differ significantly from those of a financial institution. Applying the same ESG metrics and criteria to all industries without considering their specific characteristics could result in misaligned expectations and hinder industry growth and innovation.
The issue of ESG as a non-tariff barrier is not confined to large corporates alone. Small and medium-sized enterprises (SMEs) also face significant challenges. While large corporates may have the resources to adapt to multiple ESG frameworks, SMEs often lack the capacity and expertise required for compliance. This can lead to exclusionary practices, where smaller companies are unable to participate in supply chains or access capital due to their limited ability to meet complex ESG requirements. Consequently, the very essence of ESG, which is to promote sustainability and inclusivity, is compromised.
Harmonised Effort
To address these challenges, it is imperative to create a harmonised framework that strikes a balance between promoting responsible business practices and ensuring the inclusion of companies of all sizes. Such a framework should be based on principles of proportionality, scalability, and standardisation. Proportionality ensures that ESG requirements are commensurate with the size, complexity, and impact of the company.
Scalability allows for a phased approach, enabling companies to progressively align with higher standards as they grow. Standardisation ensures consistency and comparability, facilitating transparent reporting and assessment.
Additionally, collaboration among governments, regulatory bodies, and industry stakeholders is essential to develop a unified approach to ESG. Establishing international standards, or at least converging existing frameworks, will alleviate the burden of compliance for large corporates while ensuring a level playing field for companies of all sizes. This collaboration should also extend to capacity building initiatives to support smaller companies in implementing effective ESG practices.
ESG should not be perceived as a barrier, but rather as an opportunity to drive sustainable growth and address global challenges. By creating a balanced and harmonised framework that considers the specific needs and capabilities of large corporates, we can foster a business environment where responsible practices are encouraged, innovation thrives, and stakeholders' interests are safeguarded. It is time to transform the current fragmented landscape of ESG into a unified and enabling platform that catalyses positive change on a global scale.
Harmonisation can be facilitated by developing common ESG reporting standards and metrics. Aligning with global frameworks such as the Sustainability Accounting Standards Board (SASB) or the Task Force on Climate-related Financial Disclosures (TCFD) can enhance comparability and enable Indian corporates to align with international standards.
Engaging with international investors who prioritise ESG considerations can help Indian corporates access global capital and expand their business operations. Demonstrating a strong commitment to ESG principles and transparent reporting can attract responsible investors who value sustainable business practices.
Other Concerns
In addition to ESG considerations, Indian businesses must be prepared for severe weather-related disruptions and the challenges posed by global warming. The increasing frequency and intensity of extreme weather events necessitate a proactive approach to building resilience and adaptability.
Companies need to invest in robust infrastructure, develop disaster management strategies, and implement climate risk assessments. Governments, in partnership with businesses, should establish policies that promote climate resilience and incentivise sustainable practices. By doing so, they can protect economies from the adverse impacts of climate change and foster long-term sustainability.
One area where a structured roadmap is particularly needed is green manufacturing. Green manufacturing involves adopting sustainable practices, reducing environmental impact, and promoting resource efficiency. To facilitate the transition to green manufacturing, it is crucial to provide companies with access to financing options specifically tailored to sustainability initiatives.
Financial institutions and governments should collaborate to design financial instruments and mechanisms that incentivise and support companies in adopting eco-friendly practices. This will not only promote environmental stewardship but also drive economic growth by encouraging innovation and competitiveness.
Furthermore, the Indian agriculture sector, which plays a vital role in the country's economy, requires greater corporate participation. A cluster-based mechanism can serve as an effective approach to encourage collaboration between corporates and farmers. Clusters provide a platform for knowledge sharing, resource optimisation, and market access. By creating these clusters, companies can contribute their expertise, technology, and resources, while farmers can benefit from improved productivity, access to markets, and better incomes.
However, it is important to strike a balance between corporate participation and maintaining the integrity of agricultural practices, respecting regulations on land ownership and ensuring fair trade practices.
Governments, regulatory bodies, businesses, financial institutions, and civil society must come together to create a holistic and inclusive approach to sustainability. This requires open dialogue, stakeholder engagement, and the development of comprehensive policies and frameworks. But we have to be considerate that a uniform ESG framework without considering the contextual differences, industry-specific considerations, compliance burdens, competitiveness, innovation, and stakeholder engagement can fail or harm global trade.
—The author, Dr. Srinath Sridharan, is a Policy Researcher & Corporate Advisor. He has also author of the book 'Time for Bharat'. The views expressed are personal.
Read his previous articles here
(Edited by : C H Unnikrishnan)
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