Embracing sustainable investments for good banking: ESG in BFSI

By Trisha Shreyashi

“Sustainability”: The main target of all global, local and commercial organizations since the 2010s seems to be primarily ambitious in the financial sector. A comprehensive survey of NSE 600 company valuations in FY 2020-21, recently underscored BFSI as one of the most ESG risk facing sectors. (Study by esgrisk.ai)

In the wake of the wave of globalization and technological advancement, trade barriers have reduced production and increased income generation over the past two decades. The spiral development-production-trade equation has put tremendous pressure on environmental resources. This has given rise to a huge controversy among developed and developing countries over the issue of pollution.

While businesses and corporations have been congratulated on one front, they have been criticized for contributing to environmental, social and governance (ESG) aspects.

ESG is a set of non-financial instruments for measuring and evaluating the sustainability of investments. There has been a rapid increase in sensitivity and awareness about climate change, corporate misconduct and social inequality. Corporate behavior and sustainability have become key determinants of a business’s reputation and success.

The report suggests that the services sector has faced growing controversy over the manufacturing sector. It puts the banking, finance, securities and insurance (BFSI) industry among the top controversial ESG management with IT and consulting. These range from non-compliance with Pollution Control Board regulations to environmental clearances, business ethics, employment protection practices, violations of internal business rules, non-compliance with regulatory regulations and greenwashing.

However, the report highlights the curious fact of creating a sustainable ESG model for Indian banks. Given the confusing flood of information and speculation about future regulatory changes, it has become difficult for BFSI organizations to develop a comprehensive ESG strategy. The strategy will aim to address ESG risks, otherwise known as sustainability risks by focusing on the potential impact of stakeholders in an organization and vice versa.

Environmental risks include physical risks (supply chain collapse, sea level rise, drought), and migration risks (law and regulatory, structural changes in demand and supply). Social risks include non-compliance with labor standards and lack of product security assurance. Governance risks include compliance lapses, corruption, senior management issues and data leaks. Thus, regulators, technology, market dynamics and resources are major influencers of ESG development. It affects the environment, communities, markets and future generations.

Zooming in on the BFSI sector, these factors affect not only the service provider but also the customers. Changes in sales and production disruptions can lead to higher debt defaults. Some claim that the epidemic has created a similar crisis that could be better used to address future ESG risk challenges. Operational risk is caused by high sickness rates, shutdowns, priorities for remote work, travel restrictions, network capacity issues, cyber risks, and loss of performance due to IT security. This has affected their goodwill and subsequent liquidity risk due to declining deposit withdrawal rates and declining banking services.

In light of the above discussion, it is pertinent to inform investors about the ESG structure in India. The first is the corporate social responsibility (CSR) framework under the Companies Act 2013. The second is the proposal for a social stock exchange in India. The third is the Business Responsibility and Sustainability Report (BRSR) which is mandatory for the top 1000 listed companies in SEBI from 2022 onwards.

BRSR Framework Reporting was initially voluntary for the top 1000 listed entities in FY 2021-22. The BRSR Framework seeks to integrate the financial performance of a listed entity with its ESG performance. It is pertinent to mention that the BRSR framework is the result of ratification of the 2015 Paris Agreement and the United Nations Sustainable Development Goals (SDGs) 2030. It assists regulators, investors and other stakeholders in assessing and evaluating business stability, growth and sustainability on all fronts.

Prior to the introduction of BRSR, it was the Business Liability Report (BRR) which was applicable to these organizations. However, BRR was compulsorily applicable only to the top 100 entities listed by market capitalization.

The BRSR report has three sections for publication; Such as: – General disclosure, management and process disclosure, and performance in accordance with the policy. General disclosures provide details of listed entities, products / services, activities, employees, holdings, subsidiaries, associate or joint venture companies, CSR details and transparency consent. Attempts are made to publish management and procedures to help companies demonstrate the framework, policies and procedures established for adopting national guidelines on responsible business conduct. Disclosure of policy-based performance is sought under (i) essential determinants and (ii) leadership indicators.

In addition, the number of Indian financial institution signatories to UN-Principles of Responsible Investment (UN-PRI) has increased. It only meets the expectation that ESG issues will be included in the investment analysis, ownership policy and decision making process.

(Trisha Shreyashi is a lawyer and columnist. Opinions are the author’s own.)

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