With the passage of time, clearer directives are essential to ensure India meets its true potential. But is this enough?
Let us rewind to the 1980s. Back then, global supply chains were rapidly reorienting towards low-cost manufacturing destinations. China, the economic powerhouse of this age, rode the crest of change by aggressively opening up its economy through growth-oriented reforms. By the end of the 1980s, the value added by China’s manufacturing sector was 34 per cent of their GDP as compared with India’s 16 per cent of GDP. While India has come a long way since then, red tape and poor infrastructure continue to pull us back from fulfilling our high aspirations.
Now, with ESG gaining importance among global investors, India has a golden chance of making the most of this opportunity. This strategic reorientation presents India with another chance to enter the global manufacturing supply chain. The world has changed; Indian companies shouldn’t be caught napping.
Unlike in the 1980s, supply chain choices will be driven as much by ESG factors as cost factors. A look at OECD (Organisation for Economic Cooperation and Development) member countries establishes the increasing emphasis on sustainability. Even Bangladesh, perceived as a least developed country, today safeguards minimum labour safety standards following the Dhaka garment factory fire in 2012. Punitive actions are taken against defaulters.
At a corporate level, companies worldwide are improving ESG practices in literally everything they do. Global corporations have already made ESG issues an important factor driving executive compensation.
Apple recently decided to implement ESG ‘Bonus Modifier’ for its leadership team executives on the basis of how they operate within the company’s ESG values. The 2020 Semler Brossy ESG + Incentive report (published by Harvard Law School) states that nearly 62 per cent of Fortune200 companies include some kind of ESG measures in executive compensation that can be assessed on sustainability metrics such as diversity and inclusion, gender pay, carbon footprint, energy efficiency, consumer satisfaction and waste reduction.
Time is ripe for India to cash in on the geopolitical shifts and contribute to global supply chains. India could miss the bus unless it promotes socially sustainable business models. The recently-enacted production-linked incentive (PLI) scheme can be used to promote ESG. Like investment and production targets, even ESG metrics can be defined and assessed.
Environmental compliance can be assessed via targets that include renewable energy use, water efficiency and toxic materials reduction initiatives, GHG emissions reduction strategy and supply chain environmental audit. Social obligations, on the other hand, can be gauged via data points such as emissions and health and safety targets. Finally, assessment of governance may include, risk management committee compliance and key management personnel compensation strategy inclusive of ESG. Incentives for meeting these targets can be in the form of tax benefits, interest subvention, subsidised land and priority in government contracts.
For specialised targets such as gender equality and supply chain environmental audits, more specific incentive schemes can be devised. These can be in the form of gender diversity and equality bonuses (in the form of tax incentives) for promoting gender sensitivity in business. The EU’s ‘Green Financing’ offering based on information provided under the ‘Environmental Information Disclosure System and Emission Trading Scheme’ can also be emulated to incentivise businesses, which proactively audit supply chains for sustainability.
Further, punitive tax structures along with the reversal of incentives can be used for businesses failing to comply with set standards. India needs a comprehensive, independent, and unbiased ESG assessment framework for efficient allocation of resources and rewards high performers to tower over its peers. Only if India can have a sustained, proactive engagement with strong ESG practices can it successfully capture a permanent capital in the new world order.
(Sankar Chakraborti is CEO, Acuité Ratings Group and Chairman, ESG Risk Assessments & Insights. Views are his own)
