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‘Responsible Business’ Guidelines: A fact check on India Inc. ?

A growing concern amongst the investment community is that typical financial reports do not adequately capture all the risks and externalities of a firm and thus its true performance. 

All stakeholders including investors, government and consumers are now putting pressure on companies and demanding a performance report of a company’s activities to ensure these are not detrimental to environment, society or employees. As a step in this direction, Ministry of Corporate Affairs has recently released National Voluntary Guidelines for the Social, Environmental and Economic Responsibilities of Business (NVG-SEE) 2011.These guidelines have been formulated to encourage adoption of sustainability reporting and mainstream disclosure on environmental, social and governance metrics in India. NVG-SEE provides businesses a framework to enable them to move towards responsible decision making and urges them to adopt the ‘triple bottom-line' approach.

The national voluntary guidelines consist of 9 core principles, namely:
Principle 1: Businesses should conduct and govern themselves with Ethics, Transparency and Accountability
Principle 2: Businesses should provide goods and services that are safe and contribute to sustainability throughout their life cycle
Principle 3: Businesses should promote the well-being of all employees
Principle 4: Businesses should respect the interests of, and be responsive towards all stakeholders, especially those who are disadvantaged, vulnerable and marginalized
Principle 5: Businesses should respect and promote human rights
Principle 6: Business should respect, protect, and make efforts to restore the environment
Principle 7: Businesses, when engaged in influencing public and regulatory policy, should do so in a responsible manner
Principle 8: Businesses should support inclusive growth and equitable development
Principle 9: Businesses should engage with and provide value to their customers and consumers in a responsible manner

Reporting Process under NVG-SEE

The guidelines can be adopted by all companies irrespective of their size or sector and are a unique Indian version of a reporting framework to address the needs of Indian stakeholders. Due to their universal applicability, a special section has been included in the draft NVG-SEE on the adoption of these guidelines by the resource constrained micro, small and medium enterprises (MSMEs) as well to enable greater future business opportunities and to help them remain aligned to the strategic changes in the marketplace.

NVG-SEE is accommodative of companies who are already following an internationally accepted sustainability reporting framework.  Such companies are not required to publish a separate report, but can map the 9 core principles of NVG to the disclosures made in their existing sustainability/business responsibility reports. Companies who have decided to adopt the NVG but don’t have the necessary capacity to furnish a full-fledged report can provide a statement of commitment to adoption of NVG and furnish primary details on activities undertaken in relation to these guidelines. Companies who would like to adopt NVG to the full extent can furnish reports detailing their performance on environmental, social and governance factors based on the suggested framework.

Current disclosure levels of BSE Sensex

Recently cKinetics initiated a strategic assessment of the current disclosure levels of India’s leading companies across multiple sectors to gauge the current level of preparedness of India Inc for sustainability reporting. As part of the work, the companies comprising the Bombay Stock Exchange Sensex were reviewed for their current disclosure levels viz. the reporting framework suggested by the National Voluntary Guidelines for Social, Environmental and Economics Responsibilities of Business (NVG). These 30 companies account for INR 28,218 billion market cap (as on July 22, 2011) representing almost 42% of the total market cap of companies listed on the Bombay Stock Exchange.

In this study we calculated the disclosure score for all the 30 companies which constitute the BSE Sensex.  Since NVGs have been formally adopted by the Ministry of Corporate Affairs to mainstream the subject of responsible business, we have used the framework suggested in the NVG to map the disclosure levels of Indian companies. The NVG framework has 36 parameters reflecting nine key principles related to responsible business practices.

Disclosure Score = (No. of parameters on which company discloses information)/(Total no. of parameters)

The data was collated from publically available information through company annual reports, sustainability reports and company websites. (It should be noted that the study has adopted the NVG-SEE framework as is and has not considered materiality of parameters with respect to different sectors.This implies that some parameters may not be relevant for all sector and disclosure score of companies in certain sectors may not be accurately reflected.)

Governance

From our study we found that typically Indian companies have a high disclosure level regarding governance issues. Almost all the 30 companies disclosed information about the governance structure, constitution of the board of directors, responsibilities of the board members as well as the sub-committees, internally developed code of conduct and ethics etc.  However, while the frequency of the boards meetings seem to be of a high order, it is not clear as to the extent the board reviews sustainability performance and / or sets guidelines for formulating sustainability strategies. Also, for most companies no information exists on mechanisms available to shareholders and employees to provide recommendations to the board/Chief Executive.

Disclosure on governance parameters
 
Employee welfare and stakeholder engagement

The disclosure levels are not very high for parameters related to employees’ well- being. Though almost all companies report their total employee strength, hardly any mention is made of the split between permanent and contractual employees. Also, only 8 companies report the break- up of employees by gender and only 4 disclose the number of persons with disability who form a part of their workforce. More than 50% of the companies have provided details of training programs carried out during the year but a standard metric is not used for disclosing such information. There is a need to report information in a standardized format so as to make it comparable across companies. For eg: disclosures regarding training programs undertaken by a company can be made comparable by using metrics such as average training days per employee per annum. A little over 50% of the companies studied make explicit mention of observance of human rights in their operations. There is very poor disclosure w.r.t. wages and salaries of skilled and unskilled employees. In their disclosures, none of the 30 companies has reported any incidents of delay in payment of wages.

Stakeholder engagement is a mixed bag with half of the companies providing insight into their stakeholders and the nature of engagement with them. However, there is almost no disclosure about issues on which formal dialogue has taken place between the company and its stakeholders.

Environment

India has no mandatory environmental reporting for listed companies though the Companies Act (1956) requires companies to disclose details regarding energy conservation measures undertaken by them in their annual reports. 26 out of 30 companies surveyed have listed energy conservation measures adopted by them and the remaining 4 have explicitly stated in their annual reports that this parameter is not material to their business and hence not applicable to them. Though many companies report their total energy consumption, very few disclose the percentage of renewable energy used, if any. As is evident from the chart below, very few companies disclose the percentage of recycled materials used as input raw materials. Just about 50% of the sample companies typically provide details of efforts undertaken on reconstruction of bio-diversity and mitigation of adverse impacts of GHG emissions arising from their business operations and total water consumption.

 

Disclosure on environmental parameters 
 
Community engagement and Customer Value

All 30 companies in the Sensex do believe in inclusive growth and make adequate disclosures about community investment and development work undertaken by them on account of fulfilling their corporate social responsibility. Amongst the various principles elucidated in the NVG, inclusive growth is the only one for which there is 100% disclosure amongst the BSE-30 companies.

On the other hand, there is almost negligible disclosure on product labeling effort including information regarding customer health and safety, method of use and disposal etc. Although one needs to keep in mind that this parameter may not be material for all the companies.

Others

Disclosure levels are generally poor w.r.t. product life cycle impacts except regarding use of energy efficient technologies and manufacturing/service delivery processes.
Only one third of the companies studied provide details on the policy advocacy efforts undertaken by them and the platforms used.

Poor correlation between disclosure score and stock returns

Interestingly, there exists no correlation (correlation coefficient of ~ 0.051) between the disclosure levels of the 30 sensex companies and their stock returns as compared for the period April 1, 2009 thru March 31, 2010. This poor correlation questions the need for the companies to move towards high disclosure on non-financial parameters.

Uncertainty prevails

Though the guidelines drafting committee has stated a business case for the adoption of NVG-SEE, there are still several uncertainties which need to be addressed.
•What is the readiness of Indian businesses to start disclosing on business responsibility?
•Are India investors interested in companies which fare well on ESG parameters?
•Who would be the early adopters of NVG-SEE and would there be any special incentives for such companies?
•How can the adoption process be facilitated? And what are the advantages for a company to adopt this framework?

The National Voluntary Guidelines are still voluntary and one would have to wait to see their uptake by India Inc– clearly that would depend on the benefit companies find and whether truly a business case exists for adopting these guidelines.

The author, Aparna Khandelwal is currently working for a sustainability consulting firm cKinetics.

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