Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment Inclusive growth and issues arising from it.

Key Phrases: Environmental, Social, and Governance (ESG) principles, Greenwashing, audit, independent validation, benchmarking, Coal India Ltd, BPCL, ESGRisk group, Nasdaq index.

Why in News ?

• In recent times, divestment in public sector undertakings (PSUs) is vigorously taken by the government to generate revenues, maximise value creation, and make these enterprises more efficient. It’s a step towards reform, however investors are less willing to invest in PSUs.
• One challenge highlighted consistently is their compliance with the ‘E’ in ESG principles. Although these firms have been trying to work on sustainability strategies, they’re not enough to win the trust of future investors.
• Investors have serious doubts about Environmental, Social, and Governance (ESG) issues and every opportunity to discuss ESG's has been rejected in board meetings of PSUs usually.
• Modern investors increasingly scrutinising the so-called polluting industries like cement, oil and gas, steel and shipping through the ESG lens, PSUs have to show eagerness to transit to clean operations and offerings.

What is the ESG Concept?

• ESG means using Environmental, Social and Governance factors to evaluate companies and countries on how far advanced they are with sustainability.
• ESG investing is used synonymously with sustainable investing or socially responsible investing.
• So, the concept is driven by the idea of environment-friendly practices, ethical business practices and an employee-friendly record.

Recent Trends:

• Phenomenon of Greenwashing:
  1. The greenwashing has become a common phenomenon, most of the potential buyers are wary of claims companies make about their own achievements.
  2. Effective demonstration of initiatives taken towards ESG is the missing link. This can be done through audit, independent validation and benchmarking of the voluntary disclosures.
• Some companies are accelerating their sustainability efforts to become examples of ESG reliant models.
  1. They are limiting the consumption of traditional fossil fuels in operations, moving to renewable alternatives like solar energy, slashing carbon emissions, and joining the race to net zero, they’re showing genuine ESG intent.
  2. Coal India Ltd, for instance, is shutting down small mines to focus on solar panels. The company is also refraining from starting mines that would require mass hiring.
  3. BPCL is scaling up its renewable energy portfolio.
  4. Indian Oil is setting up India’s first green hydrogen plant.

Issues:

• Complex process:
  1. Long and complex process of clean energy based development has discouraged many business entities, thus they are continuing with the old infrastructure which, by its very nature, is polluting and inefficient.
  2. Proper procedures and guidelines are missing.
• Unrealistic goals :
  1. Unrealistic to expect traditional power systems that have served the masses for decades together to integrate into new energy models overnight.
  2. Government is showing intent to roll out 24x7 electricity schemes for rural areas where around two-thirds of India’s population lives.
  3. This means electricity demand in the country is going to grow and will be reaching new peaks, a reality that cannot be ignored while assessing PSU’s ESG endeavours.
• Capital crunch :
  1. PSUs are diversing their portfolios to achieve long-term sustainability goals, they need access to a significant amount of capital to make the clean-energy transition and time to win stakeholders’ confidence.
  2. Private sectors, in comparison, are early adopters of sustainability and usually display robust ESG frameworks.
  3. There are reports that PSUs keep struggling due to liquidity crunch and slow pick up pace in their ESG endeavours.
• ESGRisk GROUP STUDY: Private vs Public companies:
  • However, based on a study conducted by ESGRisk group, it emerged that the public sector units performed marginally better than their private counterparts in managing biodiversity impact and employee development.
  • The study further revealed that private firms are a clear winner in energy efficiency, GHG emissions and water efficiency.

Steps Need to Be Taken:

• PSUs can lead the ESG landscape in India:
• They required a concerted effort to improve voluntary disclosures, highlight sustainability initiatives, publicise targets, and build a mechanism for independent audits and ESG assessments.
• Investors sense an opportunity for ESG uptake and potential to unlock revenue opportunities:
  1. Initially, PSUs with low ESG scores will struggle to win the faith of investors, who might consider themselves vulnerable to sudden shocks and high risks in the long-term.
  2. However with time with ESG compliances and disclosures will surely translate into high ESG scores and subsequently result in superior returns. This will attract the investors for further investment.
• Organisations that are more ESG-complaint generally deliver higher returns:
  1. Last year, it was reported that the Nifty 100 ESG index outperformed the Nifty 50 by posting returns of 51 per cent.
  2. The Nasdaq index, which supports transition towards sustainable capital markets, too is increasingly attracting investors.
  3. The Nordic markets in Europe have attracted many investors because they are committed to ESG models based economic growth.

Conclusion:

• Low ESG scores keep investors at a distance. Engaging with third-party, independent ESG rating agencies thus become the key to identify gaps in sustainability strategies that hinder ESG scores which, in turn, can push back divestment processes by several years.
• The decision to acquire stakes in PSUs isn’t made by circulating datasheets. Investors are keen to see whether companies are making absolute ESG responses.
• More significantly, Investors want their firm ESG-rated to be compliant with international practices.

Source: The Hindu BL

Mains Question

Q. The concept like Environmental, Social and Governance (ESG) can revolutionize the corporate sector with a more environmentally centric outlook and can synergize the triple unity of people, planet and profit. In this context, explain the concept of ESG, and how it can help Indian Government to achieve its disinvestment targets by making PSUs more ESG compliant. (15 marks).