15 October 2020
In the current neo-liberal world order, economies have become a lot more connected and part of highly complex global supply chains. This has linked, say, a small farmer (growing sugarcane) or a tea plantation worker in Assam with multinational giants and International Financial Institutions (IFIs) in multiple ways. Put differently, social and economic conditions of an informal sector worker has a direct correlation with the policies being developed or adopted by these MNCs or IFIs, in addition to other international and national government policies.
The government, businesses, other national regulatory bodies, civil society etc. are seen to be engaging in greater dialogues aimed at addressing environment, social, governance (ESG) risks through greener investment/ financing opportunities. The current global emergency of Covid-19 has accentuated the urgent need for businesses and financial institutions to assess the impact of their operations on not only the environment but also on the society as a whole. Several studies, including a recent report called ‘Sustainable Investment Action in India’ launched by Oxfam India and cKinectics, highlights how ESG investing is increasingly becoming desirable (globally) not only because it provides the much required impetus to corporate responsibility but also because it is performing better (in terms of ROI) as compared to some of the conventional investing options. The growing participation in the ESG investment space can be gauged by the launch of two ESG funds by SBI and ICICI, with Kotak Mahindra being next in the queue.
The Reserve Bank of India (RBI) in its recent annual report acknowledging ESG risk assessment as an important way to ensure banks’ long term sustainability is indeed a welcome move. To enable greater transparency, the Securities Exchange Board of India (SEBI) also floated its new Business Responsibility and Sustainability Reporting framework (BRSR) and had invited comments from multi-stakeholders.
Addressing ESG risks and challenges is sure not a one man (or one sector) show – it requires strategic and concerted efforts from all sectors. In an attempt to promote better policy disclosures by banks, Fair Finance India (FFI), a civil society coalition working towards ensuring a sustainable financial sector in the country, had submitted its recommendation to the Ministry of Corporate Affairs to include banks and financial institutions in the purview of India’s National Action Plan on Business and Human Rights (NAP).
In order to understand the overall performance of the banking sector, FFI conducted its first ‘Banks’ Policy Assessment’ in 2019, wherein eight Indian banks (4 public and 4 private banks) were assessed across 10 ESG themes namely, Nature and Climate Change, Labour Rights, Human Rights, Gender Equality, Financial Inclusion and Arms, Transparency and Accountability, and Corruption and Tax. Banks’ performances were assessed using FFGI methodology tool, based on banks’ data available on public domain. The scorecard last year had revealed that all eight banks had scored relatively high on the financial inclusion and corruption themes but scored quite low on the environment and human rights / labour rights themes (as the scorecard looks at core banking operations and not CSR). Banks’ high scores across financial inclusion and corruption themes were demonstrative of the collective effort by the Indian government and banking sector.
Amidst the transitioning towards responsible business conduct, FFI is set to launch its second Banks’ Policy Assessment report this year. The assessment becomes all the more relevant, as the suggested BRSR format looks at some common indicators. It is an opportunity for the banks to align their disclosures, with the upcoming policy requirements. Upon reviewing the BRSR framework, FFI found that though the framework tries to include gender indicators in the disclosures, the language is not gender neutral. Tools like the policy assessment and FFGI methodology gives the required policy nudge to the FIs and regulators to look at the disclosures with a lens of international policies like equator principles. These would help in bringing FDI as well, as the financial sector is seeking investments.
This year’s policy assessment will provide the needed impetus to banks to pursue cross learning and improve their ESG scores in order to meet sustainability goals. While the UNGPs, India’s National Voluntary Guidelines on Responsible Finance, and National Guidelines on Responsible Business Conduct will continue to remain influencing guidance documents, mandatory disclosures by banks across ESG parameters will be a critical starting point.
Though some Indian banks like IDFC First Bank (who is a signatory to the Equator Principles) and SBI (one of the first to launch its ESG Fund; also has a dedicated sustainability department and a broad ESG framework) have already shown leadership in the responsible financing space, there still is a long way to go. Evident over the last few months, country wide ‘informality’ across various economic sectors, coupled with widespread poverty and unemployment have intensified the impact of Covid-19 pandemic, fuelling numerous ESG related challenges in developing countries like India. To successfully overcome the challenges arising in times like these, a call for greater planning, timely risk assessments, and ESG due diligence by financial institutions would be essential drivers for our economy.
*The author writes on behalf of Fair Finance India, a civil society initiative that seeks to strengthen the commitment of financial institutions to environmental, social and governance standards.
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