A bunch of conglomerates and leading companies in India are in the process of adding environmental, social and governance (ESG) as a new parameter in the CEO variable pay as well as making it a part of the key result areas (KRAs) for top management.
These initiatives come amid an increasing push from investors to allocate capital in companies that not only generate financial returns but are also invested in social good, said top board members and company promoters.
The pandemic has taken the discussion to a fever pitch with many boards devoting significant time in their strategy meetings to discuss ESG issues, amid growing demand from all stakeholders including investors, boards, employees and consumers, said top company executives.
The increasing frequency of freak weather occurrences and climate emergencies is also making it incumbent on investors to use their capital to devise social change, by making the top management accountable on ESG goals and linking such non-financial parameters to the CEO and CXO compensation.
Harsh Mariwala, chairman of consumer goods maker Marico, said ESG has been a focus area for the company for several years, but it has now become a part of top management KRAs. "It is a huge thrust area for us and a growing demand from all stakeholders…," he added.
“A significant amount of the board’s time is today spent on discussing ESG matters. Going ahead, companies’ market cap will be judged on the basis of this, hence making it a key part of the top management performance metrics,” said Harsh Goenka, chairman of the RPG Group.
Diversified miner Vedanta is currently in a transformative programme to embed ESG into every aspect of the company’s decision-making and performance evaluation, group CEO Sunil Duggal said.
“Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities,” said Duggal. “There are continuous parallels being drawn between the unforeseen risks of a pandemic and the climate crisis, with both impacting the global economy substantially. This has made many investors and policymakers realise a greater need to accelerate investments and progress on businesses which prioritise ESG,” said Duggal.
At Vedanta, a significant portion of the KRA of all employees, including the senior leadership, is linked to safety and sustainability performance and the company has further expanded the scope to include performance against its decarbonisation agenda.
Tata Group companies such as Tata Steel, Tata Motors, Tata Consumer, Tata Power and Tata Consultancy Services have made ESG a part of deliverables for the top rung.
“Sustainability feature is one of the top four business objectives for the organisation … It is one of the most important subjects for the senior leadership team and is part of their KRA as well as the KRA of people below them,” said Sanjiv Paul, vice president (safety, health & sustainability), Tata Steel.
Board members are emphasising the urgent need for the linkage of CEO compensation to ESG goals.
“Conversations have started in the boardrooms to link non-financial parameters such as ESG with the variable pay of the CEO,” said Arun Duggal, non-executive chairman of ratings firm Icra and an independent director.
Early-stage venture capital investors too are looking to bet on startups that are actively participating in ESG as it is seen not just as the right thing to do but also brings a business case to be able to attract and retain high quality talent who can make and break the business.
“Companies that lack a coherent ESG alignment may eventually start failing to attract investor interest, despite strong financial performances,” said Siddarth Pai, founding partner and the chief financial officer at early-stage venture capital fund 3one4 Capital, who was recently appointed as its ESG officer. “Asset allocators are similarly scouting for fund managers who prioritise ESG as a lens on investment and can help infuse these principles into the DNA of their portfolio companies,” said Pai. “We will continue to pioneer this thinking in the early stage to create a portfolio with a focused alignment on their stewardship responsibilities.”
Textile major Welspun has embarked on a transformation journey to enable sustainable approach in all its operations, including sourcing of raw materials, manufacturing, supply chain and waste recycling.
“Environmental and social concerns are making modern consumers more cautious of their fashion and textile choices. It is the responsibility of conscious brands to not only ensure that ESG parameters are optimally met but also that all stakeholders, including the investors, customers and the final consumers, have visibility into the processes across the value chain,” said Dipali Goenka, CEO & joint MD, Welspun India.
(You can now subscribe to our Economic Times WhatsApp channel)
