ESG stands for environmental, social and governance. ESG data reflect the negative externalities caused by an organization with respect to the environment, to society and to corporate governance. These are non-financial factors investors use to measure an investment or company’s sustainability. Environmental factors look at the conservation of the natural world, social factors examine how a company treats people both inside and outside the company and governance factors consider how a company is run.
Here are some other things ESG looks at:
In recent years, ESG, or environmental, social, and governance, investing has slowly and steadily made its way to becoming an investment strategy whereby investors put their money in companies that are looking to make the world a better place.
Tax has important implications for a company’s approach to ESG. Tax revenue funds the social and capital infrastructure needs of a country. Therefore, corporations paying their ‘fair share of tax’ is. Companies should consider how their decisions on using tax incentives to optimise their effective tax rate can impact this.
Tax is also one of the critical risks a company faces and it could have reputational consequences. A company must consider its tax policy approach, how it is articulated, and how tax risk is managed within this framework.
An ESG reporting perspective can improve transparency and influence how tax disclosures are evaluated. Combining financial and non-financial data gives a better picture of profit and loss, i.e., integrated profit and loss beyond mere financial parameters.
It also includes material aspects like emissions, government help, and subsidies that may impact the overall corporate tax profile. Therefore, integrating tax with ESG entails developing a holistic strategy that combines financial and non-financial aspects.
In India, there is increasing regulatory focus by the Securities and Exchange Board of India on related-party transactions within groups requiring adequate approvals and disclosures to protect minority interests. These disclosures aim to provide investors with sufficient information to make informed decisions and enhance governance standards.
Focus on a company’s carbon footprint, commitments to reduce emissions, or its use of resources from a sustainability standpoint has spurred them to reimagine supply chains. This entails considerations of carbon taxes, ethical sourcing, and pricing of intra-group transactions, which ultimately impact a company’s tax profile.
Government action on incentives, grants, and credits for using green energy can be an essential catalyst in this journey. In India, production linked incentives for solar PV modules exemplify the government incentivising renewable energy and impacting investment decisions.
Frameworks of ESG reporting are also evolving to include aspects of tax transparency. The Global Reporting Initiative, one of the popular frameworks for sustainability reporting, has a tax transparency indicator in its economic component. Financial regulators are also looking at ways to
merge ESG and tax reporting.
Eco-innovation is the development of products and processes that contribute to sustainable development, applying the commercial application of knowledge to elicit direct or indirect ecological improvements. This includes a range of related ideas, from environmentally friendly technological advances to socially acceptable innovative paths toward sustainability. The field of research that seeks to explain how, why, and at what rate new “ecological” ideas and technology spread is called eco-innovation diffusion.
Eco-innovation is sometimes called & “environmental innovation” and is often linked with environmental technology, eco-efficiency, eco-design, environmental design, sustainable design, or sustainable innovation. While the term “environmental innovation” is used in similar contexts to & “eco-innovation”, the other terms are mostly used when referring to product or process design, and when the focus is more on the technological aspects of eco-innovation rather than the societal and political aspects. Ecovation is the process by which business adopts ecological innovation to create products which have a generative nature and are recyclable.
Eco-innovation is developing new ideas, promoting new operations, products and processes to protect the environment, thus obtaining environmental sustainability. Eco-innovation supports the survival of the companies by proposing an acceptable image for these companies to stakeholders. The innovation which decreases the environmental damages and hereby develops the sustainability of the firms, including eco-products, eco-processes and eco-organizational factors is called eco- innovation. Eco-innovation is one of the aims of the European Union (EU), and establishes a part of the development and economic policies. Technological progress makes the companies benefit from eco-innovation. Besides the environmental benefits; there are also cost related gains for the companies which apply eco-innovation. Organizations take eco-innovative actions because of the governmental pressures, consumers’ pleasures and the great risk of changing climate all over the world. Climate change, ozone layer depletion, acidification, eutrophication, decreasing biodiversity and land degradation are some of the environmental threats that face humanity and also the companies’ survival. Hence multiple stakeholders of the societies expect the companies to be sensitive about eco-innovation to protect the environment in order to save nature and human lives.
Examples of Sustainable Innovations / Eco-innovations
According to one report by moneycontrol.com, As many as 89 percent of investors surveyed in the 2021 Institutional Investor Survey would like reporting of ESG performance measured against a set of globally consistent standards as a mandatory requirement.
Investors and other stakeholders want better ESG disclosures to help them understand more about how a company performs, makes decisions, and creates value. They are interested in the external effects of a company’s actions, both in absolute terms and relative to other companies.
Consumers want to understand the influence of their choices on the world. Employees want to understand whether their company is driving greater equality, empowerment, better working conditions, and safer and more sustainable communities.
There is undoubtedly greater awareness and acknowledgment that companies need to have a well- thought-out ESG strategy to attract suitable investments and talent and create long-term value. While this issue has multiple facets, tax is often overlooked or underrepresented in debates within organisations.
The Securities and Exchange Board of India (Sebi) plans to simplify the framework around the Business Responsibility and Sustainability Report (BRSR), and also provide a road-map for environmental, social, and corporate governance (ESG) auditing and rating. On 06.05.22 Sebi has constituted advisory committee on Environmental, Social and Governance (ESG) matters.
The terms of reference of the Committee include the following:
Enhancements in Business Responsibility and Sustainability Report (BRSR)
I. Review of leadership indicators that may be made essential including those related to value chain
II. Developing sector specific sustainability disclosures
III. Evolving disclosures / metrics that are relevant to the Indian context.
IV. Identify areas for assurance and roadmap for its implementation
I. Developing separate/ parallel approaches for ESG rating adapted to emerging markets e.g. focus on ‘S’ including employment generation, etc.
II. Developing uniform indicators of ‘G’ as input to ESG ratings and/or credit ratings
III. Disclosures in the rationale by ESG rating providers on what and how qualitative factors were factored in the ESG ratings/observations
I. Continuous enhancement of disclosures specific to ESG Schemes of Mutual Funds with particular focus on mitigation of risks of mis-selling and
greenwashing. The evolution of standards and norms for ESG is a dynamic process that necessitates continuous evaluation.
II. Examine whether ESG funds need to have prudential norms if any.
III. Long-term plan to prescribe ESG disclosures for all Mutual Funds.
As on 06.12.22 going by an article published by The Business Standards the policy framing with regard to ESG is still in its preliminary stage and The Securities and Exchange Board of India (Sebi) could soon issue a framework for environmental, social, and governance (ESG) rating providers (ERPs)–third-party agencies that help determine ESG compliance of listed companies.
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