ESG GREENING THE WORKPLACE

The Environmental, Sustainable and Governance (ESG) has gained importance in the 21st century as more and more people are getting aware of the adverse effects of climate change and striving to reduce its impact for a better future for all. As a result, business organisations are also trying to achieve ESG goals to improve their sustainability and corporate responsibility, and as a result the HR department too is undergoing changes. Considering the same a fireside chat on 'ESG - Greening the workforce - Sustainable practices and their impact on HR', was recently held at the ‘HR-IR Conference 2024 – Navigating The Future Of HR In The Digital Era’, wherein Pradeep Panigrahi, Head - Corporate Sustainability, Larsen & Toubro (L&T) talked on the new-age requirements around ESG reporting landscape. The session was moderated by Mahesh Krishnamoorthy, Managing Director, Core Integra Consulting Services Pvt Ltd. The duo also brought forth the global challenges in ESG environmental compliance including social and governance aspects. Here are the excerpts from the session

Mahesh Krishnamoorthy (Moderator):

Explain the concept of ESG in simple terms?

Pradeep Panigrahi: ESG is not a big science. People ask me about the topic which has suddenly come into the board room and everybody is panicking. What we are talking about ESG today, has been practiced for ages. Someone in some western countries thought of putting everything in one bucket and therefore built the ESG model and it is also not new. It was initiated in the 1990s, but we have been talking about it in the post-Covid era. ESG has existed for a long time, now it is in focus primarily because of investor’s requirements. In simple terms, investors want to invest in companies, that are ESG-focussed or ESG compliance. Therefore, ESG has become critical post-Covid, when we were in the middle of a big crisis and questioning ourselves whether we were doing things correctly. It gradually ushered in the ESG context like a tsunami into the boardroom.

Q: What are the three pillars mentioned within ESG?

To explain ESG in simple terms, I will start with ‘S’ because you are in the social pillar and you know everything about ‘S’. You all are doing everything great across the social pillar. ‘E’ is where and when we need to cap the temperature changes up to 1.5 °C, that is the biggest challenge that humanity is facing. In the last century, temperatures on the Earth have gone up by 1 °C and today what you see including global floods and cyclones, are all the effects of this 1 ° change. Imagine if it goes to 2 °C and for that matter 3 or 4 °C, what will happen? It will be a big chaotic situation. Therefore, the environmental aspect is primarily driven by the climate agenda, because globally, our entire survival of humanity is at stake. There are many other pillars like water, waste, economy and biodiversity, which are linked and have interconnectivity. At the same time, if at the personal level or the organisational level, we are not focussing on 'E', especially on capping temperature change, till 2030, tempreatures may rise to a maximum of 1.5 °C, and by 2050, up to 2 °C. If you go beyond that, it will be impossible to do anything and will be beyond our control. Therefore, there is a global policy on capping the temperature by 1.5 or 2 °C.

Q: Why is governance so important?

Big rating agencies, like Morgan Stanley Capital International ESG Research, give governance the highest rating. They assign governance with up to 54%, next to the social pillar, and the environmental pillar comes third, with around 17% in the ESG sequence. If the governance enables the implementation of the right policies and practices, you have appropriate SOPs (standard operating procedures) written. It enables the government’s parameters to be driven by proper policies and strategies. If I have the right HR policy, for example, you don't have to worry about social levels. If I have the right systems in place, you don't have to take care of any other things. This is very simple and important. Therefore, it is covered in classrooms too, where 5th and 6th standard students are studying the environmental and social impacts, maybe not the governance aspects yet.

Q: What is the Indian government doing to support the endeavour or create an amenable ecosystem for corporates to achieve their ESG goals?

The Indian government is more active than many other governments in terms of ESG regulations. We have had environmental and social regulations for a long time. But at the same time, the business responsibility and sustainability (BRS) framework, has been the most important thing done in India for over a century. To cite an example, our group agreed to create a dummy report and within three months, we logged a dummy report. In FY22, when BRS report was not mandatory, we released our first report. By FY23, it became mandatory, but only for the top 1000 listed companies. So, our reporting process has been strong since then. BRS is something that is changing the boardroom agenda. We recently held a meeting with SEBI about BRS, which will make us competitive, improve our bottom line, and put us on an international pedestal. This is just one example; several similar frameworks are anticipated, and we have to tighten our seatbelt.

Q: Every corporation has to include their ESG goals and their ESG performance in the financial statements and investment decisions. How do you blend the conceptual and theoretical as we are talking about tangible hard numbers and facts that are tangible? Explain how this marriage is typically done?

It is slowly getting reflected in the financial balance sheets too. For instance, on current pricing, how much of the investment are you deploying on the environment is being shown in the balance sheet. It is coming in a big way. Regarding ESG, there are certain environmental parameters on simple things, such as how much carbon footprint a corporation has, including terms like direct and indirect carbon insurance. We call it Scope 1 and Scope 2. What is the emission from your suppliers and other areas? Similarly, on water, we have to answer, how much water do you consume and how much do you conserve, etc?

Simple matrices are available on the BRS website, and the available matrices and BRS are directly from the interception mode. These are like GRF (global reporting format), which has existed for the last 15 years, bringing the best of the regulations, and frameworks and putting them in one bucket. There are explanations for all the available matrices, including clear-cut explanations for HR. The matrices need to be understood and we need to start gathering the data and reporting it. The report is rated by a third party. This year, they have mandated BRSR core assurance for re-evaluation, with at least 95% of the data to be checked by a third party. They have already done 70-75% of the work. Once the matrices are understood and applied, it enables organisations to improve upon them.

Big rating agencies like the Morgan Stanley Capital International ESG Research, give governance the highest rating. They assign governance with up to 54%, next to the social pillar, and the environmental pillar comes third, around 17% in the ESG sequence. If the governance enables the implementation of the right policies and practices, you have appropriate SOPs (standard operating procedures) written

— Pradeep Panigrahi

Q: How can we ensure ESG compliance within corporations?

If somebody is not reporting BRS or is unsure, you can start looking at the matrices, and get the help of some environmental, social, or governance expert. Take internal things, build them, and start putting them in the matrix. It is now almost impossible to say that, there is no requirement for ESG compliance. It is not something that we can wait for. We have boards and BRS committees that meet every quarter. As part of L&T board governance, our CMD, S N Subrahmanyan, is keen to see what matrices we are putting up, and the related progress. So, if the top management gives the highest importance to the subject, then things should be alright. Otherwise, probably, we will falter somewhere and miss the bus.

Q: We hear that BRS reporting has become mandatory for the top 1000 listed companies and the EU has made it mandatory that all suppliers and companies in their countries have to give their ESG performance reports for this financial year. It means next year they may start the penalty too. So, is it right to say that ESG and BRS reporting is the worry of only these top 1000 companies?

It is not capped only for the 1000 listed companies but for everybody. It is important that every company irrespective of size, must gear up to face this. It is based on the company’s purpose-people miss the purpose. It is not that SEBI is keen to put a regulation on companies. No. The purpose is very different. It is to meet that 1.5-degree temperature cap target daily, or the purpose is to have a social coefficient, social worth/value, equity and diversity, and similar outcomes.

Do you know how the 1000 listed companies are regulated? This time, last year, we assessed our top 25 supply chain partners, and they contribute to 35% of our business. This year, we assessed our top 185 supply chain partners and they contribute to around 45% of the business (purchases), which is a huge amount estimated at INR 40,000-50,000 crores. When you assess them, we categorise them as Green, Yellow and Orange. Orange, means they are not meeting the criteria and need to improve a lot, and this is a real red flag.

We conducted one-on-one interactions with our Orange category suppliers and partners, and many of them are in this category. They are probably MSMEs and not all are in the 1000 listed companies. Many of them understood that this was a new requirement. The companies with INR 50, 60 or 100 crores of business, can affirm and say that they understand the requirement, but they will have to improve on it. We say if stakeholders or suppliers can go from our system was not geared up for this traditionally. People talked about the environment or social pillar in bits. Governance is not taught in most universities, except for MBA or higher-level courses. There is still a huge gap in supply and demand, which has to be taken care of. The need is to build the capacity from now, make everybody the champion; not only the people in the environment sector or HR but make everyone an ESG champion. Everyone, including the person who serves your tea, must be an ESG champion. In our company, we are trying to convert everyone into an ESG champion by rolling out several courses.

My HR colleagues have conducted 1000+ man-hours of ESG courses in the last six months of training. We train the top-line leadership of each business hierarchy. We tell them that this is what is important and they percolate it down. We are also developing a module which will be mandatory for all. We are also developing a film, which is work-inprogress and which will be run through to all our colleagues.

The need is to build the capacity from now, make everybody the champion; not only the people in the environment sector or HR but make everyone an ESG champion. Everyone, including the person who serves your tea, must be an ESG champion. In our company, we are trying to convert everyone into an ESG champion by rolling out several courses

Q: Can you cite an example?

We have 300,000 contract workers and everyone will be taking these courses or ‘Orange’ to ‘Yellow’, we will be encouraged to work and partner with them. Likewise, if you move from ‘Yellow’ to ‘Green’, then we are happy, otherwise, you can keep counting the days. Because, we are compliant and are facing the regulations, so whoever is partnering with us, faces the regulation and has to be compliant.

Q: How do you think that the HR-IR community can contribute to the 'E' and 'G' part? How important is it for the HRIR community in their regular work-life to incorporate E and G as part of the overall responsibility, as they are doing for the 'S' part?

I would like the HR community to take this into serious cognisance. A NASDAQ study says that 90% of millennials are interested in working with companies that have sustainability portfolios. For example, in doing business, the comparison is in focusing on doing business viz de-carbonising the portfolio. Now what do we do when we have to recruit a millennial? Millennials and Gen Z are more concerned about their future, the environment and the society. They want to live in a more comfortable position than what we are in right now. We were compromising to a greater extent on everything, but they want to ensure that the companies where they work are socially, environmentally, and governance-compliance, and take sufficient steps towards these parameters.

Q: How do we ensure the same within the HR-IR scope?

HR has a big ESG-led responsibility and many HR leaders are realising that this gap needs to be filled up. Unfortunately, sub-courses or they will be aware of the subject. The idea must permeate all across the company and when that happens then you will see that it is beyond the profit sense, and everyone will take responsibility to deliver. The action translates to collecting data. For example, if I want to collect water data from some project sites and I want to make sure that it is 100 % correct, I have to depend on the person at the farthest end, a person who is opening or closing the tap. That person has to give me the correct data, right? Therefore, you have to link everybody, and here HR has the biggest responsibility.

Q: What are your recommendations, especially for youngsters, engineering, or young MBA professionals, if they wish to pursue a career in ESG? What kind of education and certifications are available?

There are six or seven universities and institutes like IIM (Lucknow), XIMB, TERI, and Symbiosis, which have been running a course for a long time—could be your first option. Almost all IITs and IIMs have started this course, could be the second choice. There are several free courses available, like the one we are running, including the free Coursera courses for our employees. These are free courses for internal employees, including other supplementary courses. Individuals can go to Coursera or some other platform that runs the courses and make them available for free to the employees. And, once they become experts and champions, they will have the capability to run it themselves.

"With the growing population, there is an increase in resource scarcity and resource consumption, and if everyone is not geared up, then we will face a problem. Businesses will likely face more problems because we depend heavily on resources both thermal and metal resources and the need is to incorporate ESG in our daily lives"

Q: How do you simplify ESG as part of our common life?

It is a collective impact at the end of the day. For example, I have been using a cloth bag given by CII, for the last 15 years. I take it even when I go for a walk. So what I have done is, I do not bring plastic bags to my home, which causes pollution and is a massive environmental problem. Likewise, companies like Nestle and Hindustan Lever Limited are responsible for EPR (extendable producer responsibility) and they collect those plastics and recycle them. I do not know how much they do, but they do it, and that is regulated. Another simple act is that do not use electricity when you don’t need it. I am consistent with every activity that I do, which helps to avoid certain problems in the natural environment. With the growing population, there is an increase in resource scarcity and resource consumption, and if everyone is not geared up, then we will face a problem. Businesses will likely face more problems because we depend heavily on resources both thermal and metal resources and the need is to incorporate ESG in our daily lives.

Q: How has L&T imbibed ESG as part of daily life and work culture, and how have you made your entire ecosystem amenable to that, whether it is your employees, suppliers or contractual employees? How do you ensure activities that you conduct as part of government and private contracts, which involve people who are typically unskilled, semiskilled, or skilled labourers?

It works on purpose. L&T is a purposedriven organisation and has contributed to nation-building. When the purpose is charted out, everything, including the concept, gets built around the purpose. For example, there was a mandate from the current CMD's office. He said that we needed to set big targets including urban and water neutrality. Immediately, we made teams and started looking at the data and information from the sites (700 live project sites). Imagine procuring data from 1000 project sites; wherein 700+ project sites run across 19 to 20 factories and several employees. How do you bring everybody together? You cannot just bring them there by wishing or thinking about it. S N Subrahmanyan, CMD, L&T, personally set it through for nine months. It is very rare, and I have never seen such a thing in my career. For nine months, CMD supported and personally reviewed the team, and after nine months, we got our numbers ready and then publicly declared them with the involvement of everybody

Millennials and Gen Z are more concerned about their future, the environment, and the society. They want to live in a more comfortable position than what we are in right now. We were compromising to a greater extent on everything, but they want to ensure that the companies where they work are socially, environmentally, and governance-compliant, and take sufficient steps towards these parameters

Q: Can you elaborate on the leadership involvement at L&T and the impact viz ESG?

We are working at the granular level and are consistently achieving some targets. Although we are lagging in some areas, we are still tightening those areas. We are working on sustainable supply chains and tree plantation drives. Last year alone, we planted over four million trees. It was personally driven by CMD, and it is important as we talk about involving everybody in this journey. Therefore, for L&T, it is a very serious approach, which includes the board, the board committee, each IC Head, each functional head, and the CMD who has been personally driving the initiative. The result is evident as today, 24% of our raw materials come from recycled or non-recycled resources. There is a 9% global error. Our ‘Green’ business is 37%, and we have been consecutively recognised for two years as the number three in the world. We are achieving our water goals. For example, in our seashore projects, we are achieving and conserving more water than we are consuming entirely. We are now trying to vet it through a third party—a work that is in progress.

Q: What about resource efficiencies?

We are increasing our resource efficiencies, for example in our road projects in Mumbai, such as, how to maximize output with minimum use of resources. If you look at our integrated annual report and last year's report, you will find all the answers.

Q: We learned a lot in very simple terms on this complex topic of ESG. What would be your final take?

What is important is that you take the process seriously and enjoy it. The whole purpose of the exercise is to enjoy the process and achieve the result. I am grateful that I am working for a company that takes these aspects very seriously and is completely purpose-driven. And this is what helps to fuel enthusiasm, passion and whatever we want to do.