Guest Article: Social and Governance in ESG - Why Indian Companies Need to Pay More Attention
- Pavan Shivakumar
- Oct 15, 2024
- 4 min read
Environmental, Social, and Governance (ESG) criteria are essential for evaluating business sustainability and ethical practices. In this article, guest writer Pavan Shivakumar explores the current state of social and governance factors in India’s corporate sector and argues why businesses urgently need to prioritize these dimensions of ESG.
What’s the Current Landscape of India’s Corporate Sector?
India’s corporate sector is undergoing transformation with a rising focus on sustainability. However, how effectively are companies addressing social and governance challenges? According to the India Business Responsibility and Sustainability Report (BRSR), introduced in 2023, over 65% of companies struggle to tackle these issues. While environmental initiatives like renewable energy adoption are on the rise, S&G concerns—particularly labor rights, board independence, and transparency—remain pressing.
Smaller firms and certain industries lag behind, as highlighted in a 2024 SEBI report, which shows that mid-size and small companies often fail to align with international ESG standards, especially in social and governance metrics.
Addressing Social Challenges
Labor Rights and Inequality: Despite some progress, India's informal economy—accounting for over 80% of the workforce—still grapples with severe labor issues, including lack of healthcare and social security. The 2024 International Labour Organization (ILO) report reveals that 45% of formal sector workers lack basic benefits, highlighting significant gaps in labor welfare.
Diversity and Inclusion: Gender disparity in the workforce remains a significant challenge. According to the World Bank’s gender data for 2024, women comprise about 22% of India's workforce. This reflects ongoing gender issues, with women underrepresented in many industries. In leadership roles, only 15-20% of C-suite positions are occupied by women, hindered by biases and societal expectations.
Governance Failures - What Are the Implications?
Governance challenges are holding back Indian companies. The India Corporate Governance Scorecard 2024 from Institutional Investor Advisory Services (IiAS) indicates that nearly 58% of firms underperform on governance metrics, particularly in board diversity, transparency, and independence. With 41% of Indian firms reporting governance-related incidents such as fraud, weak governance mechanisms increase financial risks and undermine investor trust.
Why Social and Governance Dimensions Matter
Corporate Vulnerability
Overlooking social and governance factors exposes companies to significant risks. Governance failures can lead to financial irregularities, fraud, and investor distrust, while poor labour practices may trigger public backlash. For instance, companies that neglect labour rights are increasingly scrutinized on social media, resulting in reputational damage. This lack of robust governance compounds these issues, potentially leading to falling stock prices and loss of shareholder value.
Increasing Regulatory Pressure
With regulations tightening, how prepared are Indian companies to comply? The Securities and Exchange Board of India (SEBI) mandates that the top 1,000 listed companies disclose their ESG performance, including social and governance metrics. Companies can no longer overlook these dimensions without facing regulatory consequences.
New frameworks like the Business Responsibility and Sustainability Reporting (BRSR) are pushing Indian companies to focus more on their social impact and governance structures. Non-compliance could lead to penalties and diminish the chances of attracting ESG-focused investors.
Attracting Sustainable Investments
With a growing trend toward sustainable investment, Indian companies must position themselves effectively. A 2023 report by the Global Sustainable Investment Alliance (GSIA) indicates that sustainable investment assets worldwide had grown to $35.3 trillion, driven largely by an emphasis on S&G factors. Investors are scrutinizing governance structures, labor practices, and diversity efforts before committing funds, meaning Indian companies must meet these expectations to avoid being sidelined.
What Needs to Change for Improvement?
Strengthening Labor and Human Rights
Indian companies must address existing gaps in labor practices by offering fair wages, improving working conditions, and ensuring access to social security for informal workers. Enhanced labor conditions lead to higher employee satisfaction, lower turnover, and better operational outcomes. For example, companies providing robust employee benefits report higher retention rates by as much as 35%, according to McKinsey & Company,
Improving Transparency and Governance Practices
Companies must commit to improving board diversity, ethical leadership, and risk management. Adopting best practices in governance—such as independent audits and transparent disclosures—will build investor trust and ensure business sustainability.
Promoting Diversity and Inclusion
How can diverse teams enhance business performance? Research shows that diverse teams are 87% better at decision-making compared to non-diverse teams, highlighting the clear business case for diversity.
The Time for Action is Now
The current state of India’s corporate sector, particularly in social and governance areas, is fraught with challenges. However, these challenges present an opportunity for businesses to realign their strategies and focus on S&G to improve resilience, enhance reputation, and attract sustainable investments. By addressing labor rights, improving governance structures, and promoting transparency, Indian companies can secure their long-term future and contribute positively to the country’s broader economic development. The time to act is now, social and governance improvements are not optional; they are integral to achieving business success in today’s competitive landscape.
Pavan Shivakumar is an expert in sustainability, policy research, sustainable finance and social issues. He graduated from St Joseph's University with a dynamic exposure to Clean Mobility, Venture Capital, Strategic Partnerships and Business Finance.