This is the first in an ongoing series of easy to digest information on a topic that merits our undivided attention. I have tried to make it interesting, non-preachy yet informative, and most importantly, action-oriented. So, let's get started!!

World over, considered critiques to dismissive rants about environmental, social and governance (ESG) are appearing with increasing frequency.

As an ESG practitioner, I think such an animated, flourishing debate is welcome. Because they offer the perfect opportunity to cut through the clutter and underline what ESG is, or should be viewed as.

The ‘what’ of ESG

At its simplest, ESG is an exercise to include some data points that were typically not considered in financial decision-making.

It begins with an acknowledgment that the planet (E), people (S) and processes (G) are inseparable from and not ‘external’ to a company’s operations or profits.

This is a significant point of departure from the school of thought in vogue for the past many decades, and which still reigns in many influential circles.

For a company, it is this new-found focus that fundamentally defines sustainability, and not — as some of the critics would have it — the perception that it is an altruistic force foisted upon a profit-making machine, and ergo liable to produce the exact opposite result — unsustainability.

From the concept to its measure

To evaluate these E, S and G aspects more rigourously, practitioners define, capture and track data points under each.

The purpose is to seek a realistic understanding of what are the material factors affecting a company’s operations or its bottomline — beyond the bland numbers.

We say, for example, that if a company depends on freshwater but operates in a drought-prone area, it would be wise for it to take cognisance of that fact and plan, rather than turn a blind eye towards and be caught by surprise one day.

And how the company’s operations impact those material issues.

For instance, when a company’s operations negatively impact the environment and the community it operates out of, things can boomerang.

Much like the Plachimada protests in the early 2000s that led to the closure of the Coca-Cola plant in Palakkad district, Kerala.

This is the double materiality perspective.

We also consider factors that companies need to practice to stay relevant with the changing times, continue to have a licence to operate, meet regulatory asks, and therefore be sustainable in the long term. That could range from say, launching of electric vehicles and plant-based dietary products to cater to changing consumer preferences to ensuring the well-being of employees.

ESG ratings or rankings do not seek to measure just one aspect of a borrower (such as their creditworthiness in the case of credit ratings). Instead, they pack multiple insights missed out in traditional financial analysis that might alert financial institutions, corporates and investors to hidden risks and opportunities and future proof themselves.

CRISIL's ESG scoring framework

Reason, don’t reject

So if this is what ESG is in our understanding, why exactly is it being rejected by some sections?

Some of the reactions are visceral and defensive, while others come from not looking at ESG holistically. What is worth engaging with though, are the valid counters and we will address some of those in our next blogs.

While some ‘practitioners’ — financial institutions — were caught not practising what they preached (for example, when Deutsche Bank’s asset management firm DWS was accused of misleading investors over its environmental credentials leading to its CEO stepping down) and this rightly led to the discrediting of the ESG industry, the repercussions did not stop there and extended to the questioning of the very concept of ESG.

That’s your proverbial ‘few bad apples’ at work, but which brings our attention to the need for better checks and balances.

At its core though, ESG if practiced diligently and authentically, is a force for positive impact – financially as well as on the environment and society; impact being the operative word here. And not considering it, can be tantamount to breach of fiduciary duty.

To be sure, there are many grey areas around non-standard and non-meaningful data, transparency, regulation of ESG ratings or opinions and so on that we’re grappling with.

But this is part of the hard work required to refine and improve how ESG aspects are captured and used. Dismissing what is a well-rounded and relevant concept for our times, on the other hand, simply seems like unwillingness to change, a lazy way out.In the next post, we will cover the ‘why’ of ESG to establish how it makes business sense.

Stay tuned!