Balancing triple bottom line – Sustainable investing

Posted on November 29, 2010 by


Introduction
Climate change has brought forth the environmental aspect in investments and business functions worldwide. The threats posed by climate change and global warming are enormous and therefore CEOs of world’s leading organizations are now focusing on sustainability like never before. E&Y surveyed top companies in the world and found that in 36% of the companies the role of climate change manager is handled by the CEOs. The term “Sustainability” has shed its fancy image and now being used to demonstrate actual commitment towards environmental, social, and economic harmony. Organizations are now turning their CSR activities from merely being tree plantation drive into a more integrated social, environmental, and economic activities. Major organizations in India are now turning towards Sustainable Development Reporting based on Global Reporting Initiative (GRI).

CSR Trends in India
There is a clear trend showing the increase in number of Sustainable Development Reporting based on GRI in India. Organizations irrespective of their sizes are adopting to GRI framework to design their sustainability strategy and reporting. Such change is because of increasing pressure from governments, investors, and society at large, which has forced organizations to think about single bottom line approach. Also risk posed by climate change and depleting resources has pushed sustainability agenda into the board rooms. Now triple bottom line approach that talks about social, environmental, and economic gains has become driving force behind the CSR and sustainability initiatives.
A study conducted by NGO Karmayog shows that there is clear trend in CSR reporting and quality of the activities. Organizations are now investing in building social capital, goodwill, and environmental stewardship. Karmayog rated the CSR initiatives of India’s top 500 companies on various parameters. The rating 1 represents that the organization has initiated the CSR activities at the organization. As the rating increases, the quality of the CSR activities and reporting improves. Rating 0 represents the lack of any CSR activity in the organization.
The graph shows the CSR trend over last 3 years. There is significant drop in the number of companies which do not have any CSR activities at the organizational level. The number has come down from 229 to 129. This is also reflected in rating 1 has seen increasing trend, indicating that more companies have started CSR activities which were absent before.
Though there is significant rise in the quality of CSR and number of companies doing it, Indian companies still have long way to go before they have long term sustainable and beneficial CSR activity. As long as CSR doesn’t not bring in benefits to society and business equally, organizations will never focus on it as its core activities. CSR is seen as philanthropy in India and hence its not sustainable activity having performance targets and dedicated work resources. It suffers from lack of funding, involvement of senior management, and effective execution. On the other side if CSR is run purely for business benefits, it looses the very purpose and becomes just another marketing activity.
Following schematic shows that the way CSR run – as pet project of senior management,  philanthropy activity, or business activity through propaganda. None of these is sustainable in long runs. Partnering is the only way to makes CSR successful and sustainable. Some of the Indian companies have demonstrated that.

ESG issues in the Investment Analysis and Decision Making Process
Environmental and Social Governance issues are critical for the successful outcome of the projects. Especially in India where ESG issues have stalled some of the big ticket projects recently. Social issue halted or failed projects like Reliance mega city project in Ratnagiri district of Maharashtra. The reason given for the failure was the way land acquisition was carried out. Other examples include Posco Steel plant in Orrisa, Vedanta Resources Aluminum plant facing troubles due to social and environmental issues. Tata Motors had to shift their ambitious nano plant out of West Bengal due to social unrest. Therefore integrating ESG in investment analysis and decision making process can increase the viability of the project.
ESG integration should not be a stand-alone activity but rather one element of a holistic approach to responsible investment that encompasses actively promoting high standards of corporate governance and corporate responsibility, explaining to companies how ESG issues are built into investment processes and decisions, and playing a supportive role in public policy and wider debates on corporate governance and corporate responsibility.

SDR replaces CSR
Industrialization and globalization have changed the context of business, accelerating economic growth and intensifying social and environmental risks and impacts. A sustainability program is the sum total of corporate strategies, policies, goals and initiatives based on drivers of economic, social and environmental risk, return, resources and reputation. Sustainability program ensures that amid environmental, social and even economic uncertainty, an organization is able to adapt and remain viable in the long-term interest of the owners. Sustainability reporting as a practice, over the last ten years has evolved from being a fringe one to a mainstream practice. Some of the drivers of the same are
There is an increasing volume of queries on sustainability performance of product/services providing organizations from customers and socially responsible investors. In some cases, the RFPs by prospective clients can ask information about sustainability activities of the company, thus making it a part of market access requirement.
Reporting ones performance on sustainability front has a definite marketing value, either intended or intended. It can help in garnering recognition from third parties in form of green/sustainability rankings.
As a continuation of a fierce competition in the marketplace on all parameters, competition in public relations is ensuring that information requests such as Carbon Disclosure Project are becoming mainstream means of communicating with conscious investors and public.
Activities that are voluntary today can become mandatory by law in future. Proposed ideas such as CSR credits can make sustainability and corporate social responsibility a key governance measure for action and reporting
Companies that have good performance in sustainability and reporting it have better ability to attract and retain talent.

Sooner or later organizations have to develop their own sustainability strategies which look at Environmental, Social, and Economic aspects of the business. GRI framework allows organizations to start in that direction.

References:

1. McKinsey Quarterly Report: Making the most out of CSR, published in Dec 2009.

2. Online data available at http://www.karmayog.org

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Posted in: Sustainability