ESG Research Foundation

Pandit Madan Mohan Malaviya National (Knowledge Partner)

Mission on Teachers and Teaching
Ministry of Education
Goverment of India

CERTIFICATE COURSE
on
FUNDAMENTALS OF ESG & SUSTAINABILITY

reference Material
MODULE 2
Table of Contents

Whether ESG is Mandatory or Voluntary

Value Creation Opportunities and Benefits From ESG
Setting up an ESG Strategy
Sustainable Supply Chain and its Decarbonisation
Sustainable Procurement

ESG Research Foundation | Reference Material | Module 2 page. 1

ESG reporting has emerged as an effective tool for businesses to communicate their
Environmental impact, social responsibility and Governance practices to their investors,
customers, employees, communities and other stakeholders. ESG services helps organisations
to identify, measure and disclose their sustainability performance in an effective manner.

The evolving global landscape of ESG Reporting has prompted business leaders to recognise
the importance of aligning corporate purpose with broader stakeholders’ concerns. India has
demonstrated its commitment to ESG initiatives through regulatory framework like BRSR
(Business Responsibility and Sustainable Report) by SEBI (Securities and Exchange Board
of India) in 2021. BRSR is mandatory for top 1000 listed companies by market capitalisation.

In the US, the Securities and Exchange Commission (SEC) has approved a proposal for
extensive mandatory climate-related disclosure requirements. International Sustainability
Standards Board (ISSB), has also released in June 2023, new Sustainability Standards to
provide a truly global baseline of sustainability disclosures.

Having now realised the importance of ESG disclosures and owing to the increased pressure
from investors, stakeholders, consumers, etc, many businesses have started disclosing
sustainability and ESG related information voluntarily.

As per the paper titled- Mandatory vs. voluntary ESG disclosure, efficiency, and real effects
by Cyrus Aghamolla Byeong-Je An, In the U.S., the majority of firms in the S&P 500 issue
sustainability or corporate responsibility reports voluntarily. (Christensen et al. (2021)).

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In the figure given below, we can see the how regulations related to ESG are spread globally.

G20 Country Scores for sustainable finance and ESG disclosures policies

Source: Bloomberg

This figure below shows how TCFD (Taskforce on Climate related Financial Disclosures) is
popular among countries.

1
0F

1
https://www.spglobal.com/esg/insights/featured/markets-in-motion/global-esg-regulation

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Further, to name few more upcoming regulations, Carbon Border Adjusted Mechanism
(CBAM) will be implemented from October 1, 2023.

CSRD (Corporate Sustainability Reporting Directive) is another Framework which is going to

be implemented in EU. CSRD will be mandatory for all large European companies and
companies listed on the EU regulated markets, including EU subsidiaries of non-EU parent
companies. The new EU legislation is likely to impact approximately 50,000 companies. CSRD
replaces NFRD Non-Financial Reporting Directive and is an extended version of its
predecessor as it includes double materiality concept. Social and governance factors are also
emphasized upon in the framework apart from environmental factors.

Many organisations report voluntarily as it offers various benefits like:

1. Advantages Of ESG Reporting

• Build consumers trust and loyalty
People nowadays, especially Gen Z trust brands that are sustainable or which
are making some kind of environmental or social impact. Therefore, brands with ESG
policies in place, will not only attract new customers but also have loyal customers’
base.
In a study by First Insight in the US, it was found that Generation Z is influencing the
older generations to place more importance on sustainability in their purchasing
decisions. 21F

2
https://f.hubspotusercontent10.net/hubfs/160569/The%20State%20of%20Consumer%20Spending%20-
%20Gen%20Z%20Influencing%20All%20Generations.pdf

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 • Better transparency
Transparency encourages accountability, which is essential for collaboration and
developing actionable solutions. It also helps in unlocking capital and create solutions.
• Stakeholder relationship
Strong understanding of ESG factors help develop better relationship with
stakeholders by building trust with direct and indirect stakeholders. Even the
employees now expect their companies to be involved in ESG reporting.
• Enhanced brand value
Companies with strong ESG practices are considered as more responsible than their
peers. Moreover, the risk of misleading investors with false/ insufficient information
has worse consequences
• Measurement of current performance
ESG risk management becomes easy when there is assessment of current performance
• Benchmarking tool
ESG reporting enables organisations to compare their performance with peers It
provide a clear picture where an organisation stands and where there is scope of
improvement.
• Increased access to capital
More and more lenders now prefer investing in ESG compliant companies rather than
the ones which do not report climate /ESG related information.
• Compliance of laws and regulations
It is better to be prepared in advance as a large number of companies are already under
some ESG regulations and these are going increase further in the future. 3
2F

3
https://www.workiva.com/blog/what-are-key-business-benefits-esg-
reporting#:~:text=Increased%20operational%20efficiency%3A%20Continually%20monitoring,within%20the%20organisation%2
0and%20its

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Value Creation Opportunities – ESG

ESG provides numerous value creation opportunities for the businesses like:

• Superior Performance

• Access to capital markets and lower cost of funding

• Stakeholder Engagement and regulatory Compliance

• Access to markets and Competitive Advantage

• Manage Risks

• Attracting and retaining talent

Let us look into the value creation opportunities in detail:

1.Superior Performance

In 2020 Fidelity International released a report stating that stocks with higher ESG ratings
outperformed other stocks.

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Similarly, as per S&P Global Market Intelligence data, from Dec. 31, 2020, to May 17, 2021, 16 of 27
funds performed better than the S&P 500. Those outperformers rose between 11% and 29.3% over
that period. In comparison, the S&P 500 increased 10.8% 4. 3F

2.Access to capital markets and lower cost of funding

Organizations with higher ESG ratings tend to have access to lower cost of capital as it can
be seen in the following study by MSCI.

3.Stakeholder Engagement and regulatory Compliance

It has been realized that businesses are not only accountable to shareholders but also to all
the stakeholders.

ESG take this into account and ensures that all stakeholders are considered in decision
making. It helps in better relations with stakeholders and also offers benefits like enhanced
trust and loyalty.

4
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/most-esg-funds-outperformed-s-p-500-
in-early-2021-as-studies-debate-why-64811634

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The “Stakeholder Value Creation Chain” model is developed by Pay Governance to illustrate
the intersection of ESG strategy, the stakeholder model, and the creation of firm value.

5
4F

4.Access to markets and Competitive Advantage

As we all know that Businesses do not operate in a vacuum. In a global economy everyone is
dependent on others for cross-border trade, complex supply chains and diverse workforces,
companies are increasingly confronted with environmental issues, such as climate change,
water scarcity and pollution, as well as social factors including product safety and relationships
with regulators and the communities in which they operate. In this context, ESG can play an
important role in a company’s competitive positioning. Therefore, managing environmental
and social factors is simply part of sustaining competitive advantage in today’s economy. 6 5F

The companies which are quick to adopt and implement ESG strategies gain competitive edge
over others.

Apart from providing competitive advantage, ESG also gives access to new markets.

Demand for ESG Products is increasing globally.

5
https://corpgov.law.harvard.edu/2020/09/14/the-stakeholder-model-and-esg/
6
https://www.morganstanley.com/im/publication/insights/investment-
insights/ii_esgandthesustainabilityofcompetitiveadvantage_en.pdf

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We can observe from the graph above that in 2020 most companies experienced least growth,
ESG products jumped 303.80% from 2017. 7 6F

5.Manage Risks

ESG compliance helps in managing various risks whether they are climate related or general
tax compliances, if these risks are well managed, they help prevent scrutiny and reputational
damages etc.

Failure to comply with ESG regulations leads to operational and financial risks.

So, to avoid penalty/fines etc., it is important to adopt an ESG strategy and execute it
accordingly.

7
https://www.acuitykp.com/blog/rising-investor-demand-for-esg-in-their-
portfolios/#:~:text=Although%202020%20was%20devastating%20for,returns%20than%20equity%20or%20debt.

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6.Attracting and retaining talent

Many studies and surveys have showed that Millennials and Gen Z generation prefer to work
in companies where sustainability is a priority. They are even ready to quit from companies
which are not making any efforts on ESG and sustainability front.

These generations place even greater importance on environmental and social concerns than
their predecessors – and will expect even more from employers on these issues. 8 7F

Now that we know how important ESG is, let us see how to develop an ESG Strategy.

Setting up an ESG Strategy 9 8F

ESG is a top priority now for everyone, it is high time that every organisation
embraces the advantages that ESG disclosures bring with them and avoid the
scrutiny of regulators on account of noncompliance. The benefits of ESG
incorporation, range from competitive advantage, new opportunities, attraction and
retention of employees, access to capital and lower cost of capital and funding.

Some of the points for integrating ESG into business strategy:

First it is necessary to understand the changing ESG landscape, trends and drivers
that impact one’s business, compare where you stand from your peers and take cues
from the best one available in the industry. An ESG strategy outlines a business’s
activities concerning ESG issues.

Assess ESG maturity by identifying the strengths and weaknesses of the

organisation.

8
https://www.marshmclennan.com/content/dam/mmc-web/insights/publications/2020/may/ESG_workforce_strategy_Part_I.pdf

9
https://home.kpmg/dp/en/home/industries/environmental-social-governance/esg-strategy.html

https://www.pwc.com/gx/en/services/sustainability/responsible-corporate-strategy.html

https://www.consultancy.uk/news/29295/10-steps-to-creating-an-esg-strategy-for-your-business

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 Conduct materiality assessment – it is absolutely essential to recognise the topics
that are material to the company. Material Issues are basically risks, important from
financial and sustainability perspective.

ESG strategy should be developed so that it helps in attaining long term

sustainability goals as well as benefit its stakeholders by better managing its risks.
Mapping of both - short and long term /ambitions goals should be done, involving
risk management, gaps in delivery of the same should be addressed.

All the stakeholders board members, employees should be involved. A third party
should be employed for materiality assessment or for verification of ESG credentials.
Cost assessment plays an important role as well.

Cost of inaction should be considered too, as this can have severe consequences on
the business.

Overview of how to set up an ESG strategy:

• Conduct a thorough materiality assessment

• Engage with stakeholders – it could be employees, board of directors, clients,
suppliers, local communities
• Set SMART (Specific, Measurable, Achievable, Relevant and Time- bound)
Goals
• Conduct research and collect data and assign responsibilities accordingly
within the C-suite professionals
• Choose a framework to report - GRI, UNGC, CDP, SDG, TCFD, IIRC, BRSR,
ISSB etc.
• Be authentic and ambitious with the reporting
• Disclose and communicate
• Monitor and review progress

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ESG Strategy should be prepared in a way that will enable the organisations to move towards
achieving the Sustainable Development Goals and Net Zero.

Before we dive into our next topic- Sustainable Supply Chain, let us first understand what is
a supply chain.

A Supply Chain is a coordinated network of all the companies, facilities and activities involved
in developing, manufacturing and delivering a business’s products.

Sustainable Supply Chain

Sustainable Supply Chains refers to the companies’ efforts to consider the environmental and
human impact of their products’ journey through the supply chain, from raw materials
sourcing to production, storage, delivery and every transportation link in between. 9F
10

Ensuring sustainability in supply chain requires minimising the impact on the environment
from procurement stage to operations, till the end of supply chain, while also maintaining
profits. Recent studies have shown that people prefer to shop from or even work with
companies which are more sustainable. Having sustainable supply chain could be costly at first
but in the long run it would reap huge benefits.

And from emissions’ perspective, supply chain is all the way more important as it is a source
of a lot of scope 3 emissions.

More than 80 % emissions are from supply chain. The number of companies disclosing
emissions have increased but for scope 3 the numbers are still low. As per CDP 11, despite 10F

downstream emissions from Scope 3, being 11.4 times more than S cope 1 and 2 emissions
combined, only 20% of suppliers reported Scope 3 emissions from purchased goods and
services.

10
https://www.netsuite.com/portal/resource/articles/erp/supply-chain-sustainability.shtml

11
https://cdn.cdp.net/cdp-production/cms/reports/documents/000/006/106/original/CDP_SC_Report_2021.pdf?1644513297

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As per World Economic Forum (WEF) 12, supply chain decarbonisation can be achieved by the
11F

following steps:

• Creating transparency
• Optimising for CO2
• Engaging suppliers
• Push ecosystems

Source-World Economic Forum

To decarbonise supply chain, emissions data should be measured through a scalable

solution and then data driven climate action roadmaps should be prepared. Suppliers
should be empowered with education, awareness, trainings and best practices.
It can be challenging due to insufficient data or lack of quality data.

According to BCG analysis, food, construction, fashion and FMCG are the highest
emitting sectors.

The Eight Supply Chains That Dominate Emissions

12
https://www.weforum.org/reports/net-zero-challenge-the-supply-chain-
opportunity/?DAG=3&gclid=Cj0KCQiA54KfBhCKARIsAJzSrdoPapm_Mo3QXr7WMrqQ2v0AhgI9sN4PHFSjsW7DhE2ZCoUyuX
k8b6QaAjw3EALw_wcB

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 Source: BCG

The average cost of abating Emissions by Supply Chain.

Source: BCG

The average cost of abating emissions from supply chain in the eight sectors through
renewable energy, through circularity and CCS (Carbon Capture and Storage) is given.

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 Price Markup for Products with Net-Zero Supply Chains

Source: BCG

“Green / sustainable” products cost more than their counterparts but the good news is that
even customers are willing to pay for such products/services.

Achieving Net zero seems easier said than done, as there are a lot of obstructions in reducing
upstream emissions. As per WEF report, reducing upstream emissions is challenging due to
the following barriers:

Challenges in Execution
• Knowledge gap among suppliers
• Higher costs
• Performance and cost concerns in low carbon designs
• Procurements incentives not aligned to climate
• Hard to change in series production

Limited support
• Lack of government investments/actions
• Concern over customers’ willingness to pay
• Too high costs for individual supply chains

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 Lack of transparency
• Lack of high-quality data sharing with suppliers
• Lack of clarity on scope 3 boundaries
• Scope 3 emissions based on estimates/average

Supply chain also impact an organisation’s reputation and image.

For example, world’s leading athletic sportwear and footwear manufacturing giant, faced a lot
of criticism, when it was found that its factory workers were not treated well and were paid
below minimum wages and a plenty of other corporations have faced this type of backlash in
the past, not only resulting in tarnished image but great deal of financial losses as well.

To avoid these situations, it is essential for Corporations to ensure that their supply chain is
complying with human rights standards, products are being ethically sourced, emissions are
low and so on.

Another way to ensure supply chain sustainability is ‘sustainable procurement’.

Sustainable Procurement

Sustainable procurement refers to how businesses can identify and reduce the environmental
impacts of their supply chains.

Sustainable procurement practices “integrate requirements, specifications and criteria that

are compatible and in favour of the protection of the environment, of social progress and in
support of economic development, namely by seeking resource efficiency, improving the
quality of products and services and ultimately optimizing costs” (United Nations High Level
Committee on Management Procurement Network - HLCM PN, 2009).

Sustainable procurement is a process by which public authorities or private corporations seek

to achieve the appropriate balance between financial, environmental and social considerations

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when procuring goods, services or works at all stages of the value transformation cycle, while
considering their costs through the entire life cycle. Such considerations pertain, for instance,
to the respect of core labour and safety standards in the production process, and the energy
efficiency performance and innovative characteristics of the purchased products

Sustainable procurement integrates specifications, requirements and criteria that are

compatible with the protection of the environment and society as a whole.

There are three main pillars of sustainable procurement: environmental protection, social
responsibility, and economic prosperity.

One of the main goals of sustainable procurement is to reduce the environmental impact of
products and services throughout their entire lifecycle. This includes everything from
extracting raw materials to manufacturing to using and disposing of products. To do this,
procurers should consider things like a product’s energy efficiency, recycled content, toxins
and emissions, packaging, and durability.

Second goal of sustainable procurement is to ensure that the goods and services being
procured support social responsibility. It may include things like safe and fair working
conditions, preventing forced labour, child labour and human trafficking.

Finally, sustainable procurement aims to create economic prosperity by promoting

competitiveness, innovation, and entrepreneurship. This means supporting businesses of all
sizes – including small businesses and businesses owned by marginalised groups – and
investing I n research and development. It also concentrates on ensuring that processes are
streamlined and made as efficient as possible, to make the best use of resources and
ultimately improve your bottom line. 13 12F

13
https://www.iso20400.org/three-pillars-of-sustainable-procurement-the-environment-the-economy-and-social-
value/#:~:text=Three%20pillars%20of%20sustainable%20procurement,social%20value)%20%2D%20ISO20400.org

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 Source: Sievo.com

How Sustainable Procurement Policy can be Incorporated into an organisation

Evaluate the Existing Setup

First of all, it is essential to study what all policies exist and then new policies can be
incorporated.

Create a Policy Framework

Next a sustainable procurement policy framework should be created. This will help in
preventing future issues by ensuring adherence.

Create Awareness

All stakeholders, internal or external, must be involved and should have similar thought
process regarding the said policy.

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Optimize Collaboration

Open, consistent communication channels would enable greater collaboration across the
board, across all stakeholders, across all employees — leading to real-time feedback for policy
makers.

Sustainable Procurement requires that board members and other stakeholders are on the
same page as far as the need of such policy is concerned. Furthermore, the Procurement Policy
should be comprehensive, clearly indicating requirements and guidelines for evaluating
suppliers' environmental and social performance.

Suppliers who do not meet the sustainability criteria should be disqualified.

Suppliers' performance should be monitored regularly to ensure that they continue to meet
sustainability requirements.

Training and awareness programs should be conducted for professionals to better understand
the importance of sustainability. 14 13F

Benefits -
• Reduced greenhouse gases
• Reduced environmental impact
• Human rights support
• Increased supplier diversity
• Improved brand reputation
• Controls costs
• Lower material costs
• Risk mitigation
• Logistics optimization
• Create a greater societal impact

14
https://www.gep.com/sustainable-procurement-benefits-challenges-best-practices

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 • Boost profits and enhance CSR, and in turn goodwill
• Avoid risks in terms of ethics, legal as well as brand image
• Able to serve evolving consumer preferences

Hence, Sustainable Procurement is a process through which businesses, meet their

requirements for goods, services, works, utilities etc, in a manner which achieves value for
money on a life-cycle basis while also considering sustainable development.

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