landscape of environmental & social performance disclosure … · 2015-12-08 · – the...

Working Paper Summary

Landscape of Environmental & Social Performance Disclosure and Reporting: for Institutional Investors targeting India

Part of a study being carried out to identify investor interest for consolidating behind a common standard for capturing environmental and social performance and determining policy linkages to drive its adoption


Study lead


Acknowledgments

The authors of the report would like to extend gratitude to the following people, who have contributed to the progress of the study with their expertise and guidance and have reviewed the landscape paper

Padmini Srinivasan CCGC, IIM Bangalore Vasanthi Srinivasan CCGC, IIM Bangalore PD Jose CCGC, IIM Bangalore Ritu Kumar Actis Ben Thornley Pacific Community Ventures Sarah Gelfand Global Impact Investing Network Margot Brandenburg Rockefeller Foundation Justina Lai Rockefeller Foundation For additional information, please contact [email protected] +91.11.4050.7277

The study is led by cKinetics and supported by the Rockefeller Foundation. In addition to investors, it engages key stakeholders such as Centre for Corporate Governance and Citizenship (CCGC) at Indian Institute of Management (IIM) Bangalore, Small Industries Development Bank of India (SIDBI) and the National Stock Exchange of India (NSE).

The authors would like to acknowledge experts from the following organizations for their inputs to the study through interviews

Development Financial Institutions • CDC Group • Financierings-Maatschappij voor

Ontwikkelingslanden (FMO) • International Finance Corporation • Infrastructure Development Finance

Company • Infrastructure Leasing & Financial

Services • Small Industries Development Bank of

India (SIDBI) Pension Funds California State Teachers’ Retirement System Private Equity / Venture Capital • Aavishkaar Venture Management

Services • Actis • Acumen Fund • Aloe Private Equity • Barings Private Equity • BTS Investment Advisors • Lok Capital • Nalanda Capital • Rianta Capital • Tata Capital Asset Managers • Blue Orchard Finance • BNP Paribas Asset Management • Canara Robeco Asset Management • HSBC Global Banking and Markets (Equity

Research) • ICICI Prudential Life Insurance Company

Asset Managers • ING Investment Management (India) • Kotak Group • LGT Capital Management • Morgan Stanley Investment Management • Nomura Capital • Taurus Mutual Fund • SNS Asset Management Banks • Rabo India Finance • Yes Bank Other Stakeholders • Carleton Centre for Community Innovation • Council of Institutional Investors • GS Sustain • Harvard Business Research centre • IDFC Foundation • IFMR trust • Institute of Cost and Works Accountants of

India • International Corporate Governance

Network • ING Investment Management • National Stock Exchange of India • Responsible Investment Research

Association • Social Stock Exchange Asia • UN Principles for Responsible Investment • Vigeo


This summary surveys the landscape impacting E&S reporting in India; to inform investors seeking to converge behind a standardization of E&S

• Globally and in India, institutional investors are increasingly aware of the impact that E&S (Environmental and Social) factors have on valuations of their portfolio companies.

• Simultaneously, initiatives by the government, and other stakeholders are aiming to drive measurement and disclosure on E&S issues by businesses and investors.

• In this backdrop, this document summarizes the landscape for E&S reporting in India; to identify complementarities and gaps that exists and how it is conducive for investors to seek a standardized E&S framework.

– The complete landscape document is available at: www.cKinetics.com/CrackingTheConundrum

Why

• Why is E&S relevant for different kinds of investors

What

• What are the guidelines, principles and frameworks for investors to integrate E&S issues into operations

Which

• Which disclosure and reporting approaches are being used by finance+ investors to meet their goals of integration

Questions this document answers for investors looking for standardized E&S information:

Understanding the landscape will help investors determine whether reasons exists to standardize E&S reporting frameworks (just like standard financial reporting exists)


The landscape finds that the present time is opportune for finance+ investors to drive standardization in E&S reporting frameworks

The timing is opportune for Investors to drive a standardized E&S disclosure framework in India for 2 reasons:

Mainstream investing

Sustainable Investing and

Responsible Investing

Impact

Investing Finance+ Investing

Number and role of financial metrics in decisions

Num

ber

of Im

pact and N

on

-fin

ancia

l m

etr

ics taken into

consid

era

tion

Finance+ in India need E&S information and have similar interest in their need and use of

this information

Indian Government and global initiatives are looking to promote responsible business

actions & reporting

+

Investors, which incorporate non-financial metrics into their decision making process are referred to as finance+ investors. It incorporates ‘Sustainable investors’, ‘Responsible investors’, or ‘Impact investors’ etc.


Finance+ investors that are increasingly present in India need E&S information

Indian government and global initiatives are looking to promote responsible business actions & reporting

+

We first look at the investor drivers for E&S Standardization

Working Paper Summary Working Paper Summary

To begin with a variety of drivers were identified to make E&S factors relevant to investors…

• We examined the drivers of more than 60 investors across the following groups:

1. Banks: Both Indian as well as Global banks with presence in India

2. Development Finance Institutions (DFI’s): again both Indian and Global

3. Mutual Funds, which fell in 4 categories:

• Indian

• Global MFs with physical presence in India

• Global E&S funds investing in India

• Global funds investing in India

4. Private Equity GP's across 3 categories:

• E&S seeking investors

• ‘Social Investors’

• Rest of the PE funds

5. Pension Funds across 3 groups:

• Indian

• Global Private Pension Funds

• Global Public Pension Funds

E&S drivers for investors

Investor Reputation

Operational risk

New product development

Marketing to retail

investors / LP's

Regulatory compliance

Mandate from shareholders/

retail investors/LP's

Signatory to global

investor initiatives

Investor's philosophy

Drivers of all 14 investor types mapped to the 8 drivers


… and compared the magnitude of the drivers across the 14 investor types; to find 5 types that have the most to gain from E&S reporting

Global E&S funds targeting India, DFIs (both India and Global), PE investors seeking E&S and Social Investors are 5 types of investors that benefit most from E&S information availability.

We refer to them collectively as Finance+ investors in this document.


The Finance+ investors evaluate their portfolio and target companies on 8 E&S parameters

• All benefits that accrue to an investment because it is incorporating E&S related measures fall into one of the following eight parameters

Lenses investors use

for their portfolio

Investee reputation and social license to operate

Regulatory compliance

New product, industries and

markets including BoP

Feedstock reliability

Better resource

management

Attract and retain human

capital

Ability to attract capital

and better valuation

International consumer pull

Detailed descriptions can be found in the complete Landscape document

These become the E&S areas that finance+ investors will seek to build uniform understanding on


4 benefits of standardized E&S disclosure by companies were identified, which contribute to the investor appetite to drive standardization

• Comparability of information between companies and also in companies over time, which would lead to the following benefits:

1. Lowers cost of information collection, which would be true both while making investments as well as for ongoing monitoring.

2. Identify larger pool of target/ investible companies, which will especially be true of investors limited in their focus by their own philosophies or mandates by LP’s and Government.

3. Develop new investment products: In order to develop new financial products related to sustainability, investors require the relevant E&S data.

• Mission enhancement

4. There are certain Investors who are mandated by their own ethos or through their stakeholders (limited partners, government, etc) to create a positive environmental and social impact via their investments. For them promoting standardized disclosure of E&S information enables them to meet their missions.

It is important to note that, here we are examining the benefits accruing by ‘standardization of E&S’ and not benefits of E&S (which were highlighted earlier).


… and here too found the finance+ investors having the most to gain from standardization of E&S reporting

Low cost of info

collection

Identifying larger

pool of investible

companies

New product

development

Mission

enhancement

Banks Indian Low Medium Low Low

Global Banks with presence in India Medium Medium Low Low

DFI’s Indian* Medium Medium Low Low

Global* Medium High Low Low

Mutual Funds

Indian Low Low Low Low

Global MFs with physical presence in

India

Medium Low Low Low

Global E&S funds investing in India* High High Medium Medium

Global funds investing in India Medium Medium Low Low

Private Equity

GP’s

E&S seeking investors* High High Low Low

‘Social Investors’* High Low Low Low

Rest of the PE funds Low Low Low Low

Pension

Funds

Indian Medium Low Low Low

Global Private Pension Funds Medium Medium Low Low

Global Public Pension Funds Medium High Low Low

Benefits of standardizing reporting on E&S data in portfolio companies by investors

Source: cKinetics interviews and analysis

Low Low benefit for the investor to promote standardized E&S disclosure in the short term Med Medium benefit for the investor to promote standardized E&S disclosure in the short term High High benefit for the investor to promote standardized E&S disclosure in the short term

* Indicates the Finance+ investors



Indian government and global initiatives are looking to promote responsible business actions &

reporting

+ We now look at the Indian

Government’s and stakeholder led drivers for E&S

Standardization in India


State (Government of India) driven initiative and policies Non state driven initiatives

Existing Recent On the horizon Multi-stakeholder

driven

Investor driven

•Energy conservation

disclosure (Section 217

of the Companies Act)

•National Voluntary Guideline on

Social, Environmental and

Economic Responsibilities of

Business (NVG-SEE 2011)

•SEBI mandate on disclosure for

100 largest listed firms (Nov

2011)

•Guidelines on Corporate

Governance for Central Public

Sector Enterprises (CPSE 2007)

•Institute of

Chartered

Accountants of India

(ICAI)-sustainability

reporting framework

•Global Reporting

Initiative (GRI) India

•Carbon Disclosure

Project (CDP) India

•SME Rating Agency

of India Green ratings

•DFI and lender

guidelines

9 State and non-state driven initiatives promoting E&S disclosure and reporting that cut across sectors were examined…


… with the most comprehensive unifying framework being the NVG-SEE that was announced by the Ministry of Corporate Affairs in 2011...

• The NVG-SEE (National Voluntary Guideline on Social, Environmental and Economic Responsibilities of Business) represents a Government of India driven framework meant to encourage “responsible business action”

– It consists of 9 core principles that provides businesses a framework for taking responsible actions

– There are also 34 representative reporting indicators and development of sector guidelines are in progress

– The framework is designed on the 'Apply-or-Explain' principle.

• The reporting framework outlined in the NVG-SEE has become mandatory for the largest listed companies through a SEBI resolution passed on November 24th, 2011.

The NVG-SEE is getting visibility, traction and support from different Government agencies. It represents an opportunity for finance+ investors seeking E&S information to converge.

Working Paper Summary Working Paper Summary

… and the NVG-SEE also endorses use of other E&S reporting frameworks providing impetus for global and Indian investors to converge

If not

If not

Business entities that are preparing their Business Responsibility reports in a nationally/ internationally recognized framework

Furnish the same report with a mapping of the principles of these guidelines with disclosure

Business entities that are not fully capacitated to prepare a detailed report on RB practices

Furnish a letter signed by MD/ CEO indicating commitment to the Guidelines and a brief on activities undertaken

Business entities that committed to furnishing a detailed Business Responsibility report

Furnish a report on the basis of the framework

Scenario Reporting process

Reporting process under the NVG-SEE

Through interviews it

emerged that global

investors prefer a

global standard; while

Indian investors prefer

complying with the ‘law

of the land’. The NVG-

SEE provides a

unifying framework for

both.


To evaluate if E&S related actions may be on the anvil by Indian policy makers, the Indian interventions were mapped against 20 global ones…

Sweden

Singapore

USA

Malaysia

France

China-Shanghai

Stock Exchange

Germany

China-SEPA

United Kingdom

China -SASAC

South Africa

China-Shenzhen

Stock Exchange

India-SEBI

Australia

Japan

Japan Eco Action 21

Finland

India-Mandatory

NVG

Denmark

0% .01% 5% 50%

Percentage of businesses effected

Reve

nue

of b

usin

esse

s ef

fect

ed a

s a

% o

f GD

P

80%

60%

40%

100%

20%

Voluntary initiative Mandatory initiative Developed Country initiative Emerging Country initiative

LEGEND Sweden: Guidelines for external reporting Malaysia : Malaysian Stock Exchange CR disclosure China: Shanghai Stock Exchange Guideline on Environmental Information Disclosure by Listed Companies China: Shenzhen Stock Exchange Social Responsibility Instructions to Listed Companies China: Shenzhen Stock Exchange Social contribution value per share China: State-Owned Assets Supervision and Administration Commission (SASAC) directive France: Nouvelles Régulations Économiques 2001 Denmark: Law on CSR reporting UK: Companies Act 2006 Finland: Finnish Accounting Standards Singapore : Singapore Stock Exchange Initiative sustainability policy disclosure India: SEBI directive on CG disclosure India: SEBI directive on Business Responsibility reports by top 100 companies by Market Cap India: National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business USA: SEC filing regulation Germany: Corporate Governance Code Australia: Corporate governance guidelines South Africa: King Report on Corporate Governance for South Africa (King III), 2009 Japan: Environmental Reporting Guidelines (2007) Japan: Eco-Action 21

To understand the impact, initiatives were mapped on 2 dimensions: • Impact of the initiative as a percentage of GDP • Percentage of businesses impacted

Map of global E&S disclosure and reporting initiatives

India NVG


… and found Indian policy, although recent, as being in the progressive zone

Indian initiatives are progressive when contrasted with other emerging and developed markets; as they confirm with progressive global standards of mandatory policies for large / listed companies and voluntary policies and support for actions for other businesses.

Framework for mapping ‘Progressive’ and ‘Safe’ policies ‘Safe’ mandatory policy zone’ reflect s mandatory policies, which are directed toward a small percentage of businesses. Voluntary initiatives in the same region could be deemed over-precautionary.

Policy dead zone is the regions where there is little impact and yet impacts a large number of businesses and no policies would exist there.

Progressive mandatory policy zone is for policies that have a significant impact through a relatively small percentage of companies. This coincides with the ‘Safe voluntary policy zone’.

Progressive voluntary policy zone’ consists of voluntary policies that impacts a large percentage of the GDP and a large number of companies.

Sweden

Singapore

USA

Malaysia

France

China-Shanghai

Stock Exchange

Germany

China-SEPA

United Kingdom

China -SASAC

South Africa

China-Shenzhen

Stock Exchange

India-SEBI

Australia

Japan

Japan Eco Action 21

Finland

India - NVG

India-Mandatory

NVG

Denmark

0% .01% 5% 50% 100%

Percentage of businesses effected

Rev

enu

e o

f b

usi

nes

ses

effe

cted

as

a %

of

GD

P

80%

60%

40%

100%

20%

Voluntary initiative Mandatory initiative Developed Country initiative Emerging Country initiative

Policy dead-zone

Safemandatorypolicy zone

Progressivemandatorypolicy zone

Progressivevoluntary

policy zone



Indian Govt and global initiatives are looking to promote responsible business actions & reporting

+ The landscape is conducive for E&S standardization but a number of hurdles remain…


To determine if investors can drive the emergence of a standardized E&S framework in India, a few key questions need to be answered…

1.What is the Common ground between finance+ investors ? Can they agree to a minimum common framework for E&S disclosure?

• Specifically finance+ investors have been considered, since they stand to benefit the most in the near-term

2. Would standardized reporting framework, take a sector approach or a universal approach?

3. How does one create the critical mass for standardized disclosure to have value for investors?

4. What would be the quantitative benefits for investors and businesses? Would standardized public disclosure/ reporting reduce cost? Can enhanced E&S disclosure by companies be linked to additional capital flow?


… and the earlier questions need to be answered in context of global investor driven actions around E&S that cut across sectors

Investor driven global principles Global Standards for E&S Reporting Current investor standards

UN Principles for Responsible Investment (UNPRI) These principles provide investors a framework to incorporate ESG issues .The 960 signatories include a mix of asset owners, investment managers and professional service partners. Equator principles Based on IFC Performance Standards and World Bank ‘s Environmental, Health, and Safety Guidelines , these provide a credit risk management framework for assessing and managing E&S risk in project finance. London Principles of Sustainable Finance A set of 7 principles establishing a mechanism with which financial markets can promote the financing of sustainable development.

Global Reporting Initiative (GR) GRI produces sustainability reporting frameworks, the last one being G3 Guidelines, published in 2006. Initiated by CERES in 1998, the first generation of guidelines were released in 2000 and are supported by Sector Supplements and National Annexes . Impact Reporting and Investment Standards (IRIS) IRIS represents a set of recognized terms and definitions for reporting on social, environmental, and financial performance. IRIS is an initiative of the Global Impact Investing Network (GIIN).

• Each investor category follows its own approach of conducting E&S due diligence. For Eg. DFIs such as IFC, CDC, FMO, DEG have their own E &S due diligence criteria.

• IFC Performance Standards and CDC’s standard( toolkit) are used by many investors for their own due diligence.


To learn more…

1. The complete landscape document is available for download at: www.cKinetics.com/CrackingTheConundrum

2. To engage in investor and stakeholders conversations to answer these questions, please contact: [email protected]

3. To get the final document, tentatively titled “Cracking the Conundrum” please write to: [email protected]

http://www.ckinetics.com/CrackingTheConundrum


About cKinetics

Market Access and

Insight

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of market intervention strategy

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Market development platforms

Investment and Risk

Advisory

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risk assessment / mitigation

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Investment mandates

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Blueprint

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Implementation

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About cKinetics cKinetics is an operational consulting and strategic services firm exclusively focused on shaping scalable sustainability solutions with businesses and investors. With operations in India and in the United States, the firm has 3 focus areas: (a) resource efficiency on the fronts of carbon, energy, water and waste; (b) renewable energy and (c) smart infrastructure.

For more information visit www.ckinetics.com INDIA: 708 Hemkunt Chambers 89 Nehru Place New Delhi 110019 USA: 262 Ventura Avenue Palo Alto, CA 94306 For any queries or clarifications: [email protected]

landscape of environmental & social performance disclosure … · 2015-12-08 · – the...

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