New Delhi: Adoption of best practices in non-financial aspects of business is increasingly becoming as important as it is in the financial aspects. Investors are keen that firms mitigate social and environmental damage to avoid financial strain and ensure best practices in environment, social and governance (ESG) aspects along with financial performance.
According to Navneet Munot, executive director and chief investment officer at SBI Mutual Fund, “Sustainable business practices result in better financial performance and deliver superior returns in the long run.” He adds that a responsible business ensures that all aspects are beneficial to all stakeholders—shareholders, consumers, employees, communities as well as the environment.
SBI Mutual Fund has evolved an internal rating system for companies when considering them for loans. “This rating reviews the environmental and social impact of the business that is seeking a loan from us. We look at the company’s policies and disclosures regarding the impact of its business and whether or not they have processes in place to address any accidents or conflict that may occur due to the business,” explains Munot.
He adds a caveat: as this is a developing phenomenon in India, the number of investors looking beyond the financial performance of companies is few, but it is on the rise.
Sector experts say that while ESG concerns among Indian firms may not be the highest priority right now, they are gaining prominence. Says Robert Dornau, senior sales manager (sustainability services) at RobecoSAM, a Zurich-based asset manager, “In 2016, the participation rate in RobecoSAM’s corporate sustainability assessment by Indian companies increased by 53%.”
One of the reasons for this is that investors are considering long-term interests. As Dornau explains, “… long-termism has emerged as a central theme for investors. Over the past year, several larger pension funds have prioritized the issue of long-termism in the financial markets.”
This means that investors want to ensure that money going into a business will keep giving returns and not stop on account of litigation due to either environmental or societal neglect.
Another reason that experts cite for businesses looking beyond profitability is brand value. Says Sathosh Jayaram, director (sustainability and CSR advisory) at financial advisory firm KPMG India, “A substantial part of the market value of a company is intangible—this includes reputation and goodwill among other things. And to protect these, any business needs to adopt responsible practices.”
Munot of SBI Mutual Fund too emphasizes the need to address ESG issues. “Environmental and social concerns are often clouded by short-term profitability goals and peer pressure, which is bad for business,” he says.
Jayaram points out that when setting up a business or a plant, there are externalities—like the impact of water, air, land, discharge from manufacturing process—which are not accounted for in the profit and loss statements of companies. “As we do not take into account the externalities of businesses when measuring financial viability, chances of conflict are high,” he adds.
An increasing number of home-grown firms are thus looking to internalize processes to address these external impacts that their businesses may have. “Responsible business is risk mitigation and ensures longevity,” says Vikas Goswami, head (sustainability) at Godrej Group.