Rating agency CRISIL said its environmental, social, and governance (ESG) risk assessment of 586 Indian companies across 53 sectors, based on fiscal 2021 data, indicates 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. 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, CRISIL said.
CRISIL said overall the latest assessment placed only 14 companies in the ‘leadership’ category, 108 in the ‘strong’ category, and as many as 73 in the ‘below average’ and ‘weak’ categories.
“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," Amish Mehta, Managing Director and CEO, CRISIL, pointed out.
"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 focussing 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,” Mehta added.
CRISIL underscored that the performance of companies on the environmental (E) parameter was weaker compared with social and governance (G). The average ‘E’ score across our coverage was 45, compared with 50 for ‘S’ and ‘66’ for ‘G’. Globally, the discourse on environment has revolved around emissions, and rightly so.
The rating agency said that one of the key climate risks is the rise in average temperatures, or global warming, a significant proportion of which can be attributed to greenhouse gas (GHG) emissions. It is a critical parameter to evaluate the environmental risk profile of a comp any.
However, in India, only 1 in 5 companies reported their Scope 1 and Scope 2 GHG emissions. The disclosure on Scope 3 emissions was even worse — only 63 out of 586 companies published this data. CRISL said.
CRISL added that 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 percent for PSUs versus 12.7 percent for private companies), attrition (2 percent for PSUs and 22 percent for private), and pay disparity (CEO to median employee pay ratio of 4.8 times for PSUs versus 137 times for private).
In governance practices, however, PSUs lagged private companies — especially in board composition and functioning, said CRISIL.
“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 percent compound annual growth rate (CAGR) between fiscals 2019 and 2021, whereas that of the bottom 10 logged a negative 7 percent CAGR," said Suresh Krishnamurthy, Senior Director, CRISIL Research.
"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. Conversely, the bottom 10 ‘G’ scorers underperformed by a negative 1,200 bps, with 7 out of 10 companies underperforming their respective industries,” said Krishnamurthy.
Disclaimer: The views and recommendations made above are of CRISIL and not of MintGenie.