Climate action and diversity policies are, of late, facing geopolitical headwinds. The US government exiting the Paris Accord and discarding diversity, equity and inclusion (DEI) policies, branding legitimate concerns on environment and inclusivity as an outcome of the "woke virus", is setting the clock back. Ripples are being felt in the corporate sector across the globe. Milton Friedman's theory that the corporation exists to maximise profits for its shareholders seems to be back in vogue. The theory propounded by Edward Freeman that companies should consider the interest of all stakeholders and not merely that of their shareholders is under threat of being displaced. ESG (Environment, Social and Governance) initiatives integrated into business processes and decision-making, considering long-term sustainability and stakeholder interests, are being reconsidered.
The idea of corporate citizenship has gained currency over the past several decades. CSR (corporate social responsibility) activities sought to plough back profits for welfare schemes. Corporates, across the globe have contributed to building community resources which translates as goodwill, an intangible asset in their balance sheets. The rise of the ESG movement saw an increase in sustainability-focused investments. Driven by consumer activism, companies shifted focus away from fossil fuels to renewable energy and clean energy projects. Green funds and bonds began to attract investors, and a commitment to Net Zero by 2050 was the broad consensus among corporates. Despite the enthusiasm, challenges persist in determining the impact of ESG due to a lack of uniform metrics. However, the double materiality approach that requires reporting both the risks and impact of sustainability on an enterprise and the reciprocal impact of an enterprise's activities on the environment and society has come to be adopted. It is also appreciated that good ESG practices have long-term benefits and contribute to brand building. Practically, it is seen that retaining stakeholder loyalty influences the bottom line and increases business profits in the long run. ESG initiatives have been welcomed especially by millennials and Gen Z, who voice palpable concerns for the planet's future.
COP29, the UN climate change conference in November 2024 at Baku, pledged to finance developing countries USD 300 billion annually from public and private sources. In this context, the need for corporate commitment to reduce GHG (greenhouse gas) and carbon emissions while providing financial support for sustainability becomes crucial. The European Green Deal, an ambitious resource-efficient climate change strategy, seeks partnerships between member states, industry and investment to accelerate climate transition.
The weakening of federal mandates in the US, which once took the lead in the ESG movement, has seen a rapid rollback of related protocols. Several global banks have recently exited the Net Zero Banking alliance. However, certain jurisdictions like the EU require companies to disclose ESG-related risks. Therefore, non-compliant businesses will face a competitive disadvantage when they fail to meet the requisite sustainability standards. For instance, a proposal to tax carbon emissions would give green companies an advantage over others. The challenges of energy transition, which are increasing with the adoption of energy-intensive AI, also present investment opportunities for green energy enterprises.
The alacrity with which many big tech companies dismantled their DEI policies, letting go of employees as soon as they caught a whiff of the new federal government's stance in the US, is gravely short-sighted. Such companies with global footprints are entrenching themselves in contradictions. Can a case be made that diversity is acceptable for the consumer base? Diversity is okay for harvesting data on which their AI is trained but irrelevant to their employment policies. Undeniably, diversity and inclusion in employment policies resonate with stakeholders and enable consumers to perceive businesses as trustworthy. The influence of consumer and market pressures to retain best practices even when government policies are not supportive will significantly impact the future. Activism can potentially increase substitution by priming market space and alter consumer appetite.
In India, SEBI has introduced Business Responsibility and Sustainability Reporting, making it mandatory for the top 1,000 listed companies by market capitalisation to disclose BRSR core and BRSR core for the companies' value chain. ESG compliance would require systems audit and capacity-building modules to be put in place. Diversity hires by various corporates in India have created opportunities for women, differently-abled- and persons from disadvantaged backgrounds. ESG-informed investing helps investors evaluate the long-term risks a company faces. It leads to better decision-making, cost savings and investor confidence. The Indian government's green energy policies are massive support for energy transition efforts by corporates. It has to be emphasised that sustainability is not merely a matter of checking boxes but offers a credible business advantage.
ESG has been the product of hard lessons learnt from profiteering corporations, especially those with a global presence prone to exploitative practices. The starkest example is that of the East India Company, which gouged resources and destroyed established value chains in India to extract profits. In commenting on global capitalism, William Dalrymple said that "wrestling the laws of a country to make maximum profits" was and still remains in the "DNA of the corporates". ESG policies, which potentially mitigate risks, remain more relevant than ever today, especially in a country like India, where development efforts are directed towards achieving the common good of common citizens. Companies can contribute to development, create jobs and maintain economic stability. In these uncertain times, they can positively influence environmental and diversity policies.
(Views are personal)
Former bureaucrat and author, most recently of The Spell of the Rain Tree
Geetha Ravichandran