Author: R Sravani

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ESG investing has seen a quick expansion, with ESG-related assets exceeding $30 trillion worldwide. This increase shows that investors want their money to make a positive impact on society, not just provide financial returns. Yet, there is growing scepticism surrounding the reliability of ESG ratings that inform these investments, as inherent biases often influence them. These biases, referred to as "measurement traps," pose a risk to the full potential of ESG investing (Cohen, Gurun, & Nguyen, 2024).

Comprehending the Pitfalls of Measurement

• Emphasizing on metrics that are simple to quantify: ESG evaluators frequently give priority to metrics that are more straightforward to measure. An example is when companies focus on Scope 1 emissions to evaluate their environmental footprint while overlooking emissions from the entire value chain. The limited attention can give a false impression of the true environmental impact of a company.
• Oversimplifying Complex Features: ESG ratings can oversimplify intricate aspects, neglecting key contributions. For instance, energy companies could obtain lower ESG ratings even if they are at the forefront of green advancements with carbon capture technologies.
• Condensing Data from Many Sources into One Score: ESG ratings frequently try to consolidate various information into one numerical value, potentially masking important differences. Investors who have particular values or priorities may consider these ratings insufficient for informing their decisions accurately.

Potential solutions

In order to avoid these measurement errors, it is advised to take a dual strategy.

• Separate E, S, and G: Companies can concentrate on their strengths and investors can match their choices with their individual values by dividing the environmental, social, and governance aspects.
• Enable Companies to Set ESG Goals: Giving firms the ability to select and openly announce their ESG priorities promotes transparency and efficiency. This focus would also lessen the surface-level adherence commonly observed in ESG reporting.

Taking ESG Seriously for Tangible Results

Although the proposed enhancements can greatly benefit ESG investing, it is important to understand that for ESG to be truly successful, it needs to be taken seriously at all levels. This involves going beyond simply checking boxes and making shallow promises. Businesses are required to incorporate ESG principles into their fundamental strategies, guaranteeing that these efforts result in quantifiable, concrete results. Investors and stakeholders need to request transparency and accountability, advocating for ESG initiatives that generate tangible value and influence.

The future of ESG is not solely based on improved measurement but on a sincere dedication to the values it stands for. By adopting a more careful and exact strategy, we can make sure that ESG investing leads to significant change, benefiting not just profits but also society and the environment. 

Reference:

Cohen, L., Gurun, U. G., & Nguyen, Q. 2024, July. It’s Time to Change How ESG Is Measured.

Harvard Business Review. https://hbsp.harvard.edu/product/H08AMY-PDF-ENG?Ntt=It%27s%20Time%20to%20Change%20How%20ESG%20Is%20Measured.

In a recent report by India CSR, it has been revealed that unspent Corporate Social Responsibility (CSR) funds have reached a record high of ₹1,475 crore for the fiscal year 2022-2023. This figure marks the highest amount of unutilized CSR funds in the past five years and raises significant concerns about the effectiveness of corporate philanthropy in India.

The Unspent Funds Dilemma

The Corporate Social Responsibility (CSR) mandate in India requires companies to allocate at least 2% of their net profit towards social welfare activities. Despite this regulatory push, the recent data indicates a troubling trend: a substantial portion of the allocated CSR funds is remaining unspent. According to the India CSR report, this unspent amount has seen a significant increase, highlighting a disconnect between corporate commitments and actual implementation of social projects.

The rising trend in unspent CSR funds underscores a deeper issue within the CSR framework. While companies are meeting their financial obligations on paper, there appears to be a lack of effective execution and strategic planning in the deployment of these funds. This situation not only impacts the intended beneficiaries but also questions the integrity of CSR practices among corporations.

Factors Contributing to the Increase

Several factors could be contributing to the surge in unspent CSR funds:

1. Regulatory Challenges: Companies often face bureaucratic hurdles and lengthy approval processes for CSR projects. These delays can impede the timely allocation and utilization of funds.
2. Project Implementation Issues: There may be challenges in identifying suitable projects or executing them effectively. Companies might struggle with aligning their CSR initiatives with genuine community needs.
3. Increased Scrutiny and Compliance Costs: The heightened scrutiny around CSR activities and the associated compliance costs might discourage some companies from actively pursuing and implementing projects.
4. Lack of Transparency: Insufficient transparency in CSR spending and project outcomes can lead to inefficiencies and unspent funds.

The Way Forward

Addressing the issue of unspent CSR funds requires a multifaceted approach:

1. Streamlining Approval Processes: Simplifying and expediting the approval processes for CSR projects could help companies deploy funds more efficiently.
2. Enhancing Project Management: Companies should focus on improving their project management capabilities to ensure effective and impactful use of CSR funds.
3. Strengthening Transparency: Implementing robust reporting and monitoring mechanisms can enhance transparency and accountability in CSR spending.
4. Collaboration with NGOs: Partnering with experienced non-governmental organizations (NGOs) can help in designing and executing impactful CSR initiatives, ensuring that funds are used effectively.

In conclusion, while the increase in unspent CSR funds is a significant concern, it also presents an opportunity for companies to reassess and improve their CSR strategies. By addressing the underlying issues and focusing on effective implementation, corporations can better fulfill their social responsibilities and contribute meaningfully to societal development.

Sources:

(https://indiacsr.in/csr-unspent-funds-reach-five-year-high-of-rs-1475-cr-in-fy23/#:~:text=NEW%20DELHI%20(India%20CSR)%3A,1%2C475%20crore%20in%20unspent%20funds)

In a move signalling India's growing commitment to sustainable finance, the country has recently surpassed its 2021 record for ESG (Environmental, Social, and Governance) debt issuance. The achievement underscores a significant shift towards integrating sustainability into financial practices and has broad implications for the United Nations Sustainable Development Goals (SDGs).

Breaking Records and Expanding Horizons

According to recent reports by the Hindustan Times, India has not only met but exceeded its previous record for ESG debt issuance. This milestone highlights a burgeoning interest in green and sustainable finance within the country. The growth in ESG debt reflects a broader trend where investors increasingly prioritise environmental and social factors alongside traditional financial metrics.

India's burgeoning ESG debt market is pivotal for several reasons. First, it indicates a growing recognition of the importance of sustainability in investment decisions. The expansion of ESG debt clearly signals that both public and private sectors are aligning financial strategies with broader sustainability objectives.

Implications for Sustainable Development Goals (SDGs)

The expansion of ESG debt in India is particularly significant in the context of the United Nations Sustainable Development Goals (SDGs). ESG debt instruments are designed to fund projects that contribute to environmental sustainability, social equity, and sound governance practices. Specifically, this development impacts the following SDGs:

1. SDG 7 - Affordable and Clean Energy: ESG debt often finances renewable energy projects, such as solar and wind power installations, thereby supporting India's transition to cleaner energy sources.
2. SDG 9 - Industry, Innovation, and Infrastructure: By directing funds towards sustainable infrastructure and innovative green technologies, ESG debt contributes to building resilient infrastructure and promoting sustainable industrialization.
3. SDG 11 - Sustainable Cities and Communities: Investments in sustainable urban development, including green building projects and eco-friendly public transportation systems, are frequently supported by ESG debt.
4. SDG 13 - Climate Action: A significant portion of ESG investments is dedicated to mitigating climate change impacts through various initiatives, including carbon reduction projects and climate resilience programs.

Future Outlook

Looking ahead, India's intention to expand the scope of its ESG debt market could have far-reaching effects. The government’s proactive stance is likely to attract more international investors interested in funding sustainable projects. Furthermore, as India continues to enhance its regulatory framework and market infrastructure for ESG investments, it will likely foster greater transparency and accountability within the sector.

The increased availability of ESG debt could also set a precedent for other emerging markets, showcasing how sustainability can be effectively integrated into financial systems. This alignment with global sustainability goals not only benefits the environment but also supports social and economic development, paving the way for a more resilient and equitable future.

Conclusion

India’s surpassing of its 2021 ESG debt issuance record represents a significant achievement in the country's journey towards sustainable finance. By expanding its ESG debt market, India is not only reinforcing its commitment to sustainability but also making substantial contributions towards achieving the United Nations SDGs. As the nation continues to push the boundaries of sustainable finance, it is setting a powerful example for others to follow, demonstrating that economic growth and environmental stewardship can go hand in hand.

Sources:

• Hindustan Times: India Aims to Expand Scope of ESG Debt After Surpassing 2021 Issuance Record

Welcome to the ESG (Environmental, Social, and Governance) Blog, proudly hosted by the Centre for Responsible Management Education (CRME) at the Indian Institute of Management Visakhapatnam. This platform is dedicated to fostering insightful discussions, sharing innovative ideas, and promoting responsible management practices that align with ESG principles.

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Our blog is a collaborative effort between the Student Body Vatsalya and CRME. We aim to create a vibrant community where students, alumni, and faculty can contribute their perspectives on ESG issues, share research findings, and discuss real-world applications of responsible management.

Why ESG?

In today's rapidly changing world, businesses and organisations are increasingly recognising the importance of ESG factors in shaping sustainable futures. ESG encompasses:

• Environmental: Addressing climate change, resource management, and sustainable practices.
• Social: Focusing on social equity, community engagement, and employee welfare.
• Governance: Ensuring transparency, ethical behaviour, and robust governance structures.

By integrating these elements, we can drive positive change and create long-term value for all stakeholders.

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We invite contributions from:

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Whether you are passionate about environmental sustainability, social justice, or corporate governance, our blog provides a platform to voice your thoughts and engage with like-minded individuals. Together, we can explore innovative solutions and inspire a new generation of responsible leaders.

Stay tuned for thought-provoking articles, interviews with industry experts, and updates on the latest trends in ESG. We look forward to your active participation and valuable contributions to this important dialogue.

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