5 effective ways to understand Sustainability and ESG
Praveen Kumar V S Author: Praveen Kumar V S
13-09-2022
5 effective ways to understand Sustainability and ESG

Today, the subject of sustainability has become mainstream and there are enough discussions, publications and opinions about it. One could find a lot of definitions regarding sustainability, various sustainability reporting frameworks, climate commitments by various industries. However, how should a beginner enterprise make a start? The approach should be to learn and understand the subject well, before acting on sustainability. This blog outlines 5 effective ways to help you begin your sustainability journey and guides you with examples.


1.  Develop a general understanding of Sustainability, ESG and Net Zero


Sustainability, ESG and Net Zero are commonly referred terms within the Corporate sustainability space. Understanding these terminologies is essentially the starting point for initiating one’s sustainability journey. The concepts are wide-ranging and hence a significant amount of time needs to be spent by the ESG/Sustainability teams to explore through Analyst reports, Research papers, UN publications etc.

Below sections provide a general understanding of sustainability, to help you get started.


Transitioning businesses, a path towards sustainable development

The current way of our life is threatening not only for our survival, but for all our future generations too. The ever-increasing use of fossil fuels, industrialized forms of agriculture, our lifestyle practices to name a few are degrading our ecosystems and their functioning. This course of action is referred to as Business as Usual (BAU); it is unsustainable in the longer run. A new pathway called the Sustainable Development pathway emerged with an objective to meet the needs of present generation without compromising the aspirations of generations to come. Various developmental solutions and approaches started to emerge to aid this transition of economy from BAU to SD. Solutions like alternative fuels, renewable energy products, biodegradable alternatives, circular models etc. are emerging with an objective to do no net harm and conservation of the environment. Businesses too have taken up the path towards achieving sustainability by aligning their business strategy with this transition.


Emerging responsible business practices

Most businesses today practice the shareholder capitalism model, wherein the businesses focus primarily on investor returns. The success of a business is measured based on the maximization of value to its shareholders. Over the last decade, we are observing a shift in the landscape among leading enterprises from shareholder capitalism to stakeholder capitalism. While there is a long way to go to make this integral to the enterprise-wide DNA, these businesses have started considering the importance of stakeholders and their potential to create value together in the long-term. Stakeholders for a typical business could be customers, suppliers, employees, communities, civil society, regulators etc.

Stakeholder Capitalism refers to inclusion and engagement, while planning corporate sustainability strategy, can be taken up in the following fashion.

  • Identify relevant stakeholders who are directly or indirectly impacted by your business
  • Engage the stakeholders and listen to their legitimate needs and demands
  • Consider their needs and demands while planning business strategy


2.  Improve sector-specific understanding of sustainability

 

The Special Report on Global Warming of 1.5C (SR15) by IPCC in 2018, revealed that to avoid climate-related catastrophes, the global temperate rise should be limited to 1.5C above pre-industrial levels and achieve net-zero CO2 emissions by 2050. In addition to this, the Sixth Assessment Report by IPCC in 2021 showed that climate change is already affecting the earth’s ecosystems and it could be observed in the form of increased incidence of extreme weather, worsened droughts, forest fires and so on. Not every industry is impacted by climate change equally, for example industries like agriculture, fishing, mining, and tourism are highly dependent on nature and they are highly affected in case of degradation/damage of nature. In addition to it, not every industry can effect change to the reverse the trend, at the same scale or in the same manner. In effect, not all sustainability issues are equally important for each industry category.

With the known knowledge of the sector to which your enterprise belongs, it is important to identify what sustainability could mean for your industry and act accordingly. You should collect your industry-specific information regarding sustainability from specific guidance issued by recognized bodies like SASB, SBT, CDP, TCFD etc. You should also gather knowledge of the latest GreenTech, CleanTech, ClimateTech advancements relevant to your sector from peer conversations or even by participating in dialogues held by relevant industry bodies.

Explore SASB’s Sustainable Industry Classification System (SICS) for a recognized reference point for all types of industries. Some industries are responsible for a large proportion of the overall emissions like the Energy Generation, Airlines, Oil and Gas. At the same time, there are industries that are classified under the “hard-to-abate” category. These industries are limited by today’s advancement of technology and hence have limited potential to avoid/reduce their operational emissions; Ex: Cement, Steel, Airlines etc. And further, there are industries that are significantly service oriented and sustainability for them is about being aware of the intangibles as much as the tangibles.


3.  Understand local regulations

 

It is known that businesses need to be vigilant of the local regulations applicable to their industry’s functioning in the geographies that they operate. Most leading economies have announced a slew of directives, standards, regulations in the last 18 months on Sustainability and ESG. In fact, these regulations are volatile and dynamic and are emerging with time. It is important for the Sustainability/ESG teams of your enterprise to always stay on top of these.

For example, the BRSR (Business Responsibility and Sustainability Reporting) is a major milestone in India's regulatory landscape and is mandatory from FY22-23. It puts India on par with other major economies that have proposed similar sustainability reporting regulations for their jurisdictions, in the last year or so - EU (EFRAG ESRS), US (SEC), Singapore (SGX), UK (SDR) and of course the much-anticipated global baseline from ISSB (IFRS).

Apart from these, there could be regulations that are applicable to certain industries in your geography too. These could be environmental (EPR on E-waste, Plastic Waste etc), social (CSR), governance (Ethical practices) etc. These must be addressed in tandem with the emerging Sustainability Reporting regulations mentioned earlier.


4.  Explore the multi-dimensional nature of sustainability

 

One of the traps that most nascent enterprises fall into, is to approach Sustainability within a limited view. In some cases, it is viewed uni-dimensionally. Businesses have to realise that the subject of Sustainability/ESG is wide-ranging. Multiple aspects need to be understood and balanced to ensure “true” impact eventually. Businesses should adopt a systems thinking approach to balance their actions related to sustainability/ESG and at the same time, meet the expectations of stakeholders. 

E is the environmental criteria within ESG, that looks at how an organization utilizes the energy, discharges its waste, manages its carbon emissions, and the resources it requires to operate. S is the social criteria, that looks at the relationship between the organization, its people, and the communities where it is located. It includes activities like diversity and inclusion, labor relations, and community programs. G stands for governance, that looks at internal processes and controls followed by the organization to govern themselves. The governance aspect helps in taking effective decisions, complying with law, and meeting the needs of external stakeholders.

The ESG are the three separate systems within which an organization operates, and these systems are interdependent and interlinked, where an action (or inaction) in one will affect the other. Understanding this multidimensional aspect of sustainability is essential. Companies adopting sustainability strategy with better understanding of its multi-dimensionality nature, exhibit reduced downside risk, higher value creation, increased equity returns, and improved credit ratings.

 

5.  Study relevant global sustainability standards, frameworks and programs

 

As sustainability reporting gains significance, businesses are required to publicly report on environmental, social, and governance impacts based on their organization’s actions and functioning. The sustainability references like the established CDP, GRI, SBT, SASB, IR, TCFD or the emerging ISSB, TNFD require companies to identify material topics through stakeholder engagement that are relevant to the business as well as its stakeholders.

It is important to understand each of them and explore the best way to apply them to your business. With this wide range of available guidance, it is important to be prudent in your selection to ensure that your available resources are used most effectively. It needs to be understood that not every sustainability reference has the same objective, i.e. some are aimed at making sustainability commitments and contributing towards them, some focus on verification and certifications, some take a disclosure and reporting approach and there are others who help earn recognition for all your hard work. You need to draw a fine balance between these varying objectives and prioritize your chosen sustainability standards, frameworks or programs.


Companies that follow the 5 ways described above, can understand sustainability, ESG and Net zero in a better way. They can use such knowledge to come up with a sustainability plan with short, medium, and long-term goals and start their sustainability journey. 

Praveen Kumar V S
Author: Praveen Kumar V S

IDEX Fellow (July Cohort, 2020) | Environmental Consultant (CDP, TCFD, IRM, GHG Protocol) | Nature Educator | Active Volunteer for Environmental Conservation Activities