Category: E,S & G

Sustainability Reporting: Need of the hour

There’s always an element of uncertainty attached to the global economic, social, and environmental landscape. The uncertainty levels heighten due to disruptive events like climate-related disasters and pandemics among others. Upon closer observation, major global disruptions and imbalances are impending, sprouting from extended human negligence of sustainability issues (environmental, social, economic) and disregard of the Earth’s planetary boundaries. Needless to say, the human race is to blame for all the aforesaid shortcomings. We had it all coming!

Human negligence on sustainability issues has compounded over time, and it is only when the ramifications hit quite close to home that awareness and solutions start gaining momentum. The uncertain times we are in herald a global sustainable transition, which for businesses means adopting better ways of doing business and moving away from their Business as Usual (BAU) practices.

As businesses grapple with addressing the rising stakeholder and investor demands and regulatory pressure on sustainable practices, accountability and transparency have emerged as the differentiator that separates credible sustainable businesses from the rest. A good practice that sustainable businesses follow aside from prioritizing and embedding sustainability holistically, includes accounting for and disclosing their positive and negative impacts on the environment, society & economy through mediums like sustainability reporting. Sustainability reports are very effective in communicating and channelizing an organization’s sustainability performance across wider audiences.

Vivriti’s Mission & Sustainability Reporting

Sustainability and impact have been the underpinning purpose driving Vivriti Group’s impactful mission of bringing parity in the Indian mid-market credit space. As a financial institution that deals in debt and equity, our role in the global sustainable transition is paramount through ensuring sustainable financial flows and being a sustainable player in the market. From our business initiatives that are designed to achieve wide-scale financial inclusion, to our responsible business practices (both internal and external), we have been continuously striving to improve our sustainability performance. What better way could there be than to showcase the same through our sustainability reports! Sustainability reporting is an annual exercise for Vivriti, and it has been a transformational medium to display our adoption of responsible, accountable, and transparent practices to wider stakeholders.

Our first sustainability report, ‘Sustainability at Scale’, reflects the achievement of sustainability and impact through our financially inclusive instruments, along with the initiation and integration of sustainable business initiatives.

Our second and latest sustainability report, ‘Beyond Inclusion’ – is centered around surpassing our mission’s objective and magnifying our impact by building ‘a circle of sustainable champions’ through our client-focused ESG offerings. The theme aptly reflects our ongoing commitment to improve our own sustainability performance while uplifting others in the journey. Over the past year, we have devised and implemented various measures to achieve the latter. We formed an ESG Committee, framed and rolled out relevant ESG policies, developed an ESG risk assessment framework, started conducting portfolio-level ESG due diligences, and designed monitoring and stewardship engagement for our clients. Through such client focused ESG measures, we aim to help all our clients embed similar practices and improve their sustainability performance.

Sustainability reporting is a global reporting practice among companies, and there are many reporting frameworks available that companies can choose to align with. Adherence to a widely used framework like the Global Reporting Initiative (GRI) standards helps ensure consistency, comparability, and standardized reporting. Our second sustainability report is based on the updated 2021 GRI standards, which makes it mandatory for companies to follow the reporting principles & disclosure requirements therein. We have measured and provided disclosures on all the parameters required by GRI 1 – Foundation 2021, GRI 2 – General Disclosures 2021, and GRI 3 – Material Topics 2021.

The core of sustainability reporting comprises disclosing and reporting relevant information backed by verifiable data. The appointment of a third-party independent consultant to audit and verify our report has given an additional layer of credibility to the reported information. We also ensured our data collection, measurement, and reporting methods were systematic and methodical.

Below are the steps we followed in measuring and disclosing the reported data:

1. All data asks were mapped with the requirement of the reporting framework
2. For data collection, management & measurement, we involved all verticals – Admin, HR, Compliance, Risk, IT, Finance, Sustainability & Impact Team
3. Appointed a third-party consultant to audit and verify the reported information
4. Only verified information and data have been disclosed in the report

Delving into the reported information

(I) Effective risk management & board oversight

Sustainability and impact are ingrained in our vision, mission and values, and its prominence has been ratified at the Board level while percolating across the organization. Our ESG interventions holistically address not only the ESG risks & opportunities from our operations (through our sustainability strategy, framework & initiatives) but also that of our clients (through our ESG risk management framework, exclusionary sector list, Vivriti’s Sustainability Assessment Model (VSAM), client ESG due diligence, and monitoring & stewardship engagement).

(II) Environmental & Social accountability

Our environmental & social initiatives are derived from our responsible business intent that transcends our operating boundaries and includes our value chain players through shared responsibility.

(a) Environmental Initiatives:

1. Measures to minimize negative environmental impact:

• Energy-efficient electronic appliances, lighting, and air-conditioning systems
• Low-flow water fixtures with sensors and aerators
• Hand dryers installed near wash basins to replace the usage of paper napkins
• E-waste from all offices is collected centrally at the Chennai Office and further handled by a third-party waste handler for sustainable and safe waste treatment and disposal
• Negligible food wastage ensured in our offices in Chennai & Mumbai

 

2. Carbon emissions reduction/ decarbonization measures supporting transition to a low carbon economy:

• Our Mumbai Office currently purchases a green power tariff and is powered by 100% renewable energy
• Aligning our lending & investing towards a responsible & climate-focused portfolio through the implementation of the ESG Policy, Energy Policy, and Green Finance Framework

3. Climate action & ambition:

• In the purview of our cognizance and responsibility towards climate emergency and action, we have adopted decarbonization initiatives and ESG risk management framework that applies to our operations and to our portfolio
• Our climate commitments will continually be strengthened to gradually align with 1.5 to 2 deg C pathways
• Future adoption of relevant global frameworks and target-setting (Taskforce on Climate related Financial Disclosures (TCFD), Carbon Disclosure Project (CDP), Science Based Targets Initiative (SBTi), etc.)
• We are a current TCFD Supporter and will be adopting the TCFD framework for managing climate risks and opportunities by 2024 or later.

(b) Social Initiatives:

As a socially responsible business, we have implemented various initiatives focused on the upliftment & wellbeing of our people and communities.

1. Focus on our people:

• Our policies and initiatives catering to Health, Safety & Environment (HSE), Diversity, Equity & Inclusion (DE&I), Human Rights, Prevention of Sexual Harassment (POSH) ensure our workplaces are safe, inclusive, ethical & free from any discriminatory practices
• Employee benefits:
  • Financial assistance provision for educational advancement, professional development, relocation, personal travels, emergencies & childcare
  • Interest-free employee loans, car leases, bonuses, Employee Stock Option Plans (ESOPs), medical insurance benefits & various leaves
  • Technical training & performance management measures
  • Weekly team reviews, annual/quarterly goal setting, monthly town halls, team outings, offsites, sports league & festival celebrations
  • Other perks – complimentary meals, free daily cab facility for employee commuting, remote working opportunities, and mental health support for new mothers. Our Chennai Office also has games, gym and creche facilities.

2. Focus on our communities

As a responsible business, our positive impact on communities and our social responsibility is non-negotiable. Our Corporate Social Responsibility (CSR) focus areas span across various social initiatives – environmental sustainability & community development, financial literacy, employee engagement, and research & advocacy. The CSR initiatives shortlisted in FY22-23 include a lake restoration project in partnership with the NGO – Environmentalist Foundation of India, and seed funding for two innovative projects of start-ups from the IITM Incubation Cell, Chennai; where, one project is building an advanced sensor technology for real-time river water quality detection & timely intervention for the river Ganga, and the other project is building disability-friendly electric vehicles that can be operated by wheelchair users in university campuses.

Conclusion

Priority ESG topics or material topics addressed in the report are derived from the stakeholder materiality assessment that we conduct annually. The materiality assessment revolves around double materiality, anchoring on the internal impact that sustainability issues have on the organization and the organization’s external impact on society, environment and economy. The topics are reflective of the gaps and areas that need intervention to ensure a sustainable business.

Utilization of various stakeholder engagement channels and mediums, including the materiality exercise, has been pivotal in determining our priority material topics. The report presents the case studies of the top 3 material issues thus identified, with a deeper dive into the risk & opportunity, business case & impact, and addressal and progress measurement of the issues.

Branching from our robust governance measures that address ESG risks & opportunities to implementation of targeted policies, frameworks & initiatives, our commitment to sustainability is strongly rooted on the grounds of ethical, accountable & transparent business practices that are based on leading & emerging sustainability and ESG trends. We strive for continuous improvement in our practices catering to the financial and ESG materiality of our operations and beyond (by building a ‘circle of sustainable champions’), while maintaining People, Planet & Profit at the forefront of our business’s strategy and operations.

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List of Abbreviations Used:

1. ESG – Environmental, Social & Governance
2. VSAM – Vivriti’s Sustainability Assessment Model
3. GRI – Global Reporting Initiative
4. GHG Protocol Standards – Greenhouse Gas Protocol Standards
5. TCFD – Task Force on Climate-Related Financial Disclosures

 

Disclaimer:

The views provided in this blog are of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment.  

In Part I and Part II, we have discussed ESG risk & opportunities and explained the enormous power and responsibility the financial sector holds in terms of funding and transitioning towards sustainability. Taking this forward, we would focus more on the different ESG risk integration strategies and how Vivriti Group as an organization has redefined the due diligence of its portfolio companies to include impact & sustainability.

The real equation is turning ESG theory into action. Today it not only matters how the business is performing financially but also how it operates and what it stands for. So, the real question is how to make a purpose-driven investment decision. And what are the factors that directly impact how a company operates?

According to research conducted by George Serafeim, professor of business administration at the Harvard Business School, businesses are most successful financially and in terms of ESG when combined efforts are made to focus only on factors that directly impact how a company operates—referred to as material ESG factors. For example, for a sole proprietor having a small online jewellery trading business with 10 employees, data security would be a material ESG issue because the business handles user data while its labour practices would be considered immaterial at its current start-up stage.

ESG metrics can be extremely useful to investors for purpose-driven decision-making. Due to the lack of official standards yet on how to incorporate ESG factors into decision-making, one tries to choose from the below investment strategies which align best with his sustainability goals and existing risk integration frameworks.

At Vivriti, we started with the goal of constructing a values-aligned portfolio (Negative exclusionary screening/ Positive best-in-class screening, and Portfolio tilts). The organisation has taken a step forward to include and integrate ESG risk assessment in its existing risk framework.

Vivriti has developed its in-house Sustainability Assessment Model across 37 sectors assessing all its borrowers and originators on their environment, social, and governance parameters and identifying the ESG risks and opportunities. The taxonomy of which is based on global frameworks such as Global Reporting Initiative (GRI) standards, Task Force on Climate-Related Financial Disclosures (TFCD), and Indian ESG/ Sustainability reporting standards such as Business Responsibility Report (BRR)/ Business Responsibility and Sustainability Reporting (BRSR).

The on-field due diligence carried out by the ESG analyst alongside business and credit analysts reinstalls the importance of sustainability in the final decision-making. The observations and assessments are translated into a report that also includes an action plan & a stewardship engagement plan to mitigate the ESG risks. The stewardship centers around four principal parameters – talent, society & environment, corporate governance, innovation & customer trends.

The transition to the integrated framework could be time-consuming but it is definitely a foot forward in our sustainability journey. One might wonder how Vivriti’s portfolio companies have reacted to the ESG due diligence. Well, curiosity is the fuel for discovery, inquiry, and learning. It has been reassuring to discover how smaller companies are willing to incorporate ESG practices in their business activities as they recognise the long-term rewards both financially and for the greater good; it is the direction that is lacking!

Sustainability is a collective journey and Vivriti believes in charting the course along with its business partners.

Disclaimer: The views provided in this blog are the personal views of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment.  

In the first part of the series, we primarily discussed what is ESG, where is India in this equation & how Vivriti kick-started its sustainability journey. Taking this forward, we would focus more on Vivriti’s ESG & Impact philosophy to include our sector choices as well as our ESG risk & opportunity assessments.

Our ESG & Impact philosophy

In order to move a step closer to our goal, we need businesses and entrepreneurs to adapt to the Indian ecosystem and traditions in such a manner that sustainability and impact become key outcomes and not end up merely as checkboxes.

We cater to the diverse needs of our customers across various sectors including but not limited to financial services, renewable energy, healthcare, agriculture, and infrastructure. We seek to implement our mission through two business models. Firstly, through our NBFC entity Vivriti Capital, where we build credit history and robust lending processes. Secondly, through our AMC arm Vivriti Asset Management, which aims to channel global capital to its funds’ portfolio companies. Both these businesses are set up with a clear goal of ensuring inclusive and equitable growth for mid-market enterprises in India.

To deliver the impact where it matters the most, we employ a sector agnostic strategy, thus broadening the scope to a wider audience. We have delivered both direct & indirect forms of impact through multiple channels as discussed below:

Direct impact through thematic lending and investment in sectors such as microfinance, small and medium enterprises, Agri finance, healthcare, and clean energy.

For instance, Vivriti has financed an emerging leader in the underserved solar power market, infusing the requisite capital for the latter’s growth plans. Similarly, Vivriti helped an SME lender commence its capital market journey by investing in its first listed bond.

Our financial services portfolio, largely comprising of retail NBFCs, has the last-mile reach fuelling credit to millions of households and microenterprises. This enabled us to not only target financial inclusion but also fundamentally reduce economic inequalities through the empowerment of women & promotion of rural entrepreneurship.

Indirect impact through better ESG engagement by proactively embracing the opportunity to introduce new ways of stewardship. As part of its diligence process, Vivriti has been advising its portfolio companies on better governance and disclosure practices, in turn helping them tap the right avenues of capital in the long term. We have also suggested improvement in processes that enable companies to drive ground-level impact for their end customers.

For instance, we encouraged a mid-sized asset financer to employ a better auditor helping it attract an institutional pool of capital. On another occasion, when one of the rural financing lenders lacked employee enabling policies, through our engagement, we were able to drive home the point that employee well-being initiatives and processes are necessary for the company’s long-term growth strategy.

ESG Risk & Opportunities assessments

Adopting ESG assessment presents both risks and opportunities for an organisation. Our comprehensive framework enables us to identify, evaluate, monitor, and manage ESG risks. We follow a risk-based approach where clients/transactions that carry high ESG risks are subjected to enhanced evaluation and due diligence by a specialised ESG team for approval.

We intend to measure and monitor the ESG footprint of our portfolio companies by integrating the ESG risk assessment process with on-field diligence and periodic risk monitoring. This would also help us enhance our stewardship efforts and strengthen our engagement with the portfolio companies.

The Future of ESG

Today, ESG research is going deeper and becoming more sophisticated. As the taxonomy of ESG has evolved, so too has the ability to use data to analyse the world of ESG. Integrating ESG metrics into research on a thematic or issue-led basis, such as how various exclusion strategies will impact a portfolio or integrating ESG factors into investment recommendations, is seeking attention. Over the past decade, the growth in awareness and the adoption of ESG has been one the most dominant trends in the investment industry and is likely to be true for the next decade as well.

As per a 2022 study on global ESG trends by the Harvard Law School, the momentum toward the adoption of ESG in the investment approach continues. Europe took the lead in ESG charge, all of which are depicted in the chart below:

The focus is also shifting from what a company invests in to how it invests, and that trend will gather pace in the coming years. This is a growing but niche part of the ESG market that aims to get to the core of what responsible markets are. This is likely to result in significantly greater scrutiny of investment practices and bring institutions into the ESG world as contributors to rather than facilitators of the ESG movement. In the past decade, ESG has moved from a niche investment area to an overlay of a foundation of investing, permeating every aspect of capital markets and the investment industry.

Over the recent years and particularly after Covid-19 investors, corporates and stakeholders globally have started realizing that Environmental Social and Governance (ESG) practices have a significant impact on financial performance and enable better access to capital and business opportunities. As per a study by American investment research firm Morgan Stanley Capital International (MSCI) on global and emerging corporates over 2015-19, companies that are rated higher by ESG scores are found to have lesser exposure to systematic risks (which are risks inherent in the entire market affecting all industries) compared to ones with low ESG-ratings.

The accelerating embrace of ESG practices globally is changing the way businesses perceive and report on sustainability. Thus, in a rapidly evolving ESG landscape, developing an understanding of ESG parameters has become crucial to today’s corporate management and investors alike.

What is ESG?    

ESG is primarily a risk assessment and mitigation tool that provides a framework for evaluating an organisation’s environmental, social, and governance performance beyond traditional financial performance indicators. ESG performance of a company is complementary to its bottom line, contributing to the creation of long-term stakeholder value while being responsible towards society.

The three interconnected dimensions E, S, and G are explained as follows:

Setting on the path to a net-zero future, climate-related risk disclosures have gained momentum. This has led to global market players’ adoption of formal ESG reporting frameworks and standards such as Global Reporting Initiatives (GRI), Sustainability Accounting Standard Boards (SASB), Task Force for Climate-related Disclosures (TFCD), Carbon Disclosure Project (CDP), EU Sustainable Finance Disclosure Regulation (SFDR), and Integrated Reporting.

At the onset, the adoption of these frameworks was primarily done by the larger listed entities globally. As per the KPMG Survey of Sustainability Reporting, 80 out of the top 100 companies by revenue in 52 countries, aka N100, reported on sustainability in 2020, showing an improvement of 5% since the last survey in 2017. The below chart depicts the increasing trend in the adoption of sustainability reporting by N100 companies:

Where is India in this equation?

With the changing global dynamics of how business is done and the advent and active adoption of ESG practices in the West, India began its own journey when SEBI mandated the top 100 listed entities to report on ESG by introducing Business Responsibility Report (BRR) in 2012. In 2021, SEBI replaced the existing BRR with a more robust Business Responsibility and Sustainability Report (BRSR). The core aim of BRSR is to empower all the stakeholders of the capital markets with the non-financial information of an organization through ESG reporting. It will be applicable to the top 1,000 listed entities by market cap and contain disclosures related to:

• ESG risks and opportunities
• Sustainability-related goals, targets, and performance
• Environmental impact covering aspects including resource usage, emissions, waste management, etc, and
• Social impact covering the workforce, value chain, communities, and consumers.

Similar to the BRR, the BRSR framework is also based on the nine core principles of the National Guidelines on Responsible Business Conduct. However, unlike BRR where disclosures were limited to Yes / No responses to a questionnaire, BRSR expands itself into both qualitative and quantitative ESG data for each of the nine principles drawing references from international reporting frameworks such as GRI, SASB, CDP, TCFD, and EU SFDR. BRSR has been made mandatory from FY23.

Though BRSR doesn’t pertain to unlisted companies at this point, the need of the hour demands that they start crafting their ESG strategies into their businesses as well to tap new opportunities to access global capital more favourably. The shift will further be primed by a pared-down Lite version of the BRSR framework that SEBI is currently consulting on for the unlisted companies of India to eventually bring them up the curve.

As the financial sector solves for today and plans for tomorrow and beyond in the face of uncertainty, it is imperative for the sector to develop resilience and response to risk management. Hence, robust governance on one hand and social and environmental aspects on the other hand hold equal prominence for businesses to flourish and benefit the people and the planet. The financial services sector needs to lead the way in driving the transition to a sustainable economy.

Vivriti’s ongoing ESG journey

As a purpose-led organization, Vivriti Group’s prime motto has been to deepen the debt markets for mid-market enterprises by solving a multitude of issues including information asymmetry, structuring, risk perception, and liquidity. Vivriti’s efforts are deeply mission-driven, to equalise access to debt and build capital market access for mid-market enterprises that are critical for India’s progress and sustainability.

To enable access to deep pools of capital from international and domestic capital markets, Vivriti has invested in ESG risk measurement, as well as impact assessment of its portfolios. Vivriti has also followed a proactive approach to ESG risk mitigation, through active engagement with its portfolio companies. Further, Vivriti has invested significantly in its own ESG framework – in key social aspects such as diversity, gender equality, inclusion, and employee well-being, as well as in becoming a net-zero organisation. Keeping up with our commitment towards a sustainable future, we have come up with our first sustainability report – Sustainability at Scale. The report highlights Vivriti’s ESG initiatives during FY22, its commitment to responsible investing, and its contribution to India’s growth story by aligning the business objectives with the UN Sustainable Development Goals 2030.

Engaging in sustainable practices and meeting the ESG criteria is the need of the hour today. The new equation is turning ESG theory into action and driving sustainable outcomes from meaningful change to the measurable value. Extending the theory around ESG, our next posts will focus on ESG in the unlisted segment, and materiality for debt investors including challenges and noise around ESG, throwing more light on greenwashing.

Disclaimer:

The views provided in this blog are the personal views of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment.