The document discusses the increasing importance of environmental, social, and corporate governance (ESG) factors in investment analysis, highlighting a significant rise in company disclosures related to ESG performance. It emphasizes the integration of ESG issues into financial frameworks and the scrutiny from investors, regulators, and stakeholders, noting disparities in ESG practices across different countries. The document further explores the evolution of corporate social responsibility reporting, the role of regulatory frameworks, and the impact of ESG activities on financial performance, suggesting a growing recognition of ESG's relevance to long-term investment success.

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AN ASSESSMENT OF OPERATIONALIZATION OF DISCLOSURE OF
ENVIRONMENTAL, SOCIAL & CORPORATE GOVERNANCE
Sudipta Saha Roy
Assistant Professor in Commerce
Serampore College, Serampore, Hooghly
E-mail:sudiptasaharoy@yahoo.com
There is growing evidence that suggests that Environmental, Social and corporate Governance
(ESG) factors, when integrated into investment analysis and decision making, it may offer
investors potential long–term performance advantages. The number of companies disclosing
information on their environmental, social and governance performance has grown very
significantly in recent years. For large multinational companies, disclosure of ESG information
has become a mainstream phenomenon It has become shorthand for investment methodologies
that embrace ESG sustainable factors as a means of helping to identify companies with superior
business models. ESG factors offer portfolio managers added insight into quality of a
company’s management, culture, risk portfolio and other characteristics. By taking advantage of
the increased level of scrutiny associated with ESG analysis, managers’ portfolios seek to
identify companies based on performance indicators like
• Whether that company exhibits leadership in their industries.
• Whether that company is better managed and more forward thinking.
• Whether that company is better at anticipating and mitigating risk, meet positive
standards of corporate responsibility.
• Whether that company is focused on the long term.
The applications of Sustainable Accounting, Reporting and Standardizations have taken a slow
pace. The process began during early 1970s when it focused on social responsibility. During
mid-late 1970s, it was shifted to employees and unions. 1980s saw explicit pursuit of economic
goals with a thin veneer community concern and redefinition of employee rights as the major
theme. In the 1990s attention shifted to environmental concern. Slowly, ‘environment
reporting’, ‘triple bottom line reporting’, ‘sustainability reporting’ came into light.
Literature Review
Serafeim et al. (2011) outlined the history and trends of corporate social responsibility reporting
to encourage a discussion around the decision points and implications of reporting regulations,
as in 2011 the European Commission was deciding on how to best modify the existing
European Union policy on corporate disclosure of ESG information. The EC had to determine
what types of organizations would be required to disclose, which international framework
would serve as a standard reporting guideline, and if ESG disclosure would be integrated with
financial material in one annual report.

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Pearce and Clark (2011) pointed out that investors are showing an increasing interest in ESG
issues. They also drew out the difference between a values-based approach (based on an
investor’s unique beliefs) and the concept of sustainable financial value (based on the
integration of ESG issues within the standard financial framework), and discussed how this
distinction can help inform an investor as they seek to specify their objectives. However,
interest in ESG issues varies by country and by type of investor, both in its intensity and in the
way the interest is expressed.
Al-Janadi et al. (2012) explored that voluntary disclosure has been found lacking for most of the
items of social and environmental information. In comparing the results of voluntary disclosure
between the two countries, it was found that UAE companies have significantly higher
voluntary disclosure than Saudi companies, with an average of around 42% for UAE companies
and 32% for Saudi companies.
Brokerage House Analysts in the year 2004 at the request of the UNEP Finance Initiative Asset
Management Working Group made a study on the Materiality of Social, Environmental and
Corporate Governance Issues to Equity Pricing on 11 sectors (UNEP Finance Initiative, 2004),
where it was found that Firstly, ESG criteria affect shareholder value both in the short and long
term; Secondly, Governments can reduce barriers to ESG analysis by mandating and
standardising the inclusion of these criteria in national and international financial disclosure
frameworks; and Finally, Innovative techniques are being developed to perform financial
analyses of ESG criteria in response to growing investor demand.
Hong Kong Exchanges & Clearing Limited (2011) published Environmental, Social and
Governance Reporting Guide. The Integration of Environmental, Social and Governance Issues
in Mergers and Acquisitions Transactions, Trade buyers survey results assessed trade buyers’
attitudes to evaluating ESG risks and opportunities in their Memorandum & Articles of
Association (M&A) activities of the company. The survey consisted of 16 interviews with
corporate buyers from a range of sectors and involved a discussion around the key topics viz.,
integration of ESG factors into the due diligence process; integration of ESG factors into M&A
price, sale and purchase agreements; and integration of ESG factors in the post-acquisition
period. Even, the Handbook Integrating Environmental, Social and Governance Issues Into
Institutional Investment A Handbook for Colleges and Universities (2007) aimed to serve as a
resource for colleges and universities that are interested in integrating ESG considerations into
investment decisions.
Status of ESG - Global Perspective
Between September 2009 and February 2010 the European Commission hosted a series of 6
workshops to explore how companies disclose ESG information.
In USA over $2.29 trillion in assets are currently managed using one or more strategies that
consider ESG issues. This means that one out of every ten dollars under professional
management in the United States today is involved in some form of ESG investing.

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Measures of ESG risk and accountability are playing increasingly significant roles in investment
evaluation processes. Asset managers with a strong ESG philosophy might consider French and
British companies as fertile grounds, as the study of ESG ratings in major developed markets
ranks them as the No. 1 and 2 countries in this arena. This suggests that French and British
firms may experience fewer ESG-cost-related headwinds to their stock prices than companies
that are not as far along in implementing ESG practices.
Based on Thomson Reuters ASSET4’s integrated ratings for 2009, Asian markets, in general,
and Hong Kong and Singapore in particular, are ESG laggards. This implies few Asia-related
opportunities for ESG investors looking for exposure to this region over the short term.
However, the region’s higher economic growth potential may enable firms to invest more in
ESG practices, cushioning ESG-related earnings volatility and cost impact in the long term.
The level of corporate disclosure of environmental practices is higher for European countries, in
general, and for France and Germany, in particular. Countries in North America have the lowest
ratings on environmental measures, implying lower disclosure and/or lower adherence to
environmental standards.
UK companies have done well from the corporate governance perspective, helped by a strong
regulatory framework and stringent legislation for listed companies, while French companies
have shown a greater sense of social responsibility. Japanese companies, however, lag their
global peers in developing a strong corporate governance code. Lack of shareholder activism
and extensive cross shareholdings among Japanese companies may be impeding strong
corporate governance, despite recent reforms.
Status of ESG - Indian Perspective
Traditionalists see CSR as a potential distraction and loss of focus from fiduciary duty to the
company and its shareholders. “Trust Us” culture is no longer working (companies can rely on
society’s broad acceptance that they act in good faith). “Show Us” culture has taken over
(companies have to constantly demonstrate their intent and conduct to change for the better to
remain relevant). Studies found that individual ESG incident can impact company’s financial
performance and strategic positioning. Chronic or multiple ESG problems could signal broader
management issues. The main objective of the investors is to maximize financial returns subject
to specific risk tolerances. However, this orientation among investors is changing as they are
increasingly realizing that ESG factors can be a business risk for companies operations both in
the short as also in the medium to long run. Companies, therefore, need to maintain positive and
constructive relations with key non-financial stakeholders such as employees, customers,
communities, government to:
➢ Maximize sustainable competitive advantage (business risk)
➢ Minimize operational/ reputational risks (financial risk)
The Securities and Exchange Board of India (SEBI), in a major decision, has mandated that
listed companies report on ESG initiatives undertaken by them. The SEBI board met on

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November 24, 2011 to discuss and pass the resolution to solicit Business Responsibility Reports
from listed companies, as a part of the latter’s Annual Reports. The SEBI press release stated
that the Business Responsibility Reports should describe “measures taken by them (companies)
along the key principles enunciated in the 'National Voluntary Guidelines on Social,
Environmental and Economic Responsibilities of Business’ framed by the Ministry of
Corporate Affairs (MCA).” In order to ease the transition, this decision would be immediately
applicable only to the top 100 companies (by market capitalization) and subsequently be phased
for the remaining companies. SEBI has, in the recent years, laid increasing significance on
sustainability reporting and has lent support to ESG disclosure and standard setting initiatives.
The 2001 corporate governance committee also encouraged companies to report on
sustainability initiatives as a part of the compulsory compliance reports. Building on to the
Corporate Social Responsibility Guidelines, the National Voluntary Guidelines released by the
Ministry of Corporate affairs, Government of India, outlines principles for responsible business
action and provides guidance and frameworks for the implementation of the same.
Impact of ESG Activity on Financial Performance
Evaluating the impact of ESG issues in making investment decisions is not a new phenomenon.
In particular, corporate governance acts as a driver of returns has been fundamental to many
credible investment approaches for a long time. But social and environmental issues have not
been identified as a separate discipline or field of study until more recently. Concern about
corporate governance tends to rise with the incidence of spectacular corporate failures. The
recent near-failure of many large banks has led to a strong focus on governance and, in
particular, the role of the board in risk management. With the rise in societal and corporate
adaptation to global warming, and the regulatory response to the associated risks, the impact of
environmental issues on security prices is on the rise. Also, the social impact of corporate
activity has become more visible. The link between the recent bank bailouts, the resulting
burden on taxpaying citizens and lower economic growth is widely perceived. Recent events
have undermined the commonly-held assumption that the financial sector is neutral in its effect
on the macro-economy. Simply put, all this highlights the importance of understanding
emergent issues in social and environmental fields, and bringing greater effectiveness and
consistency to the focus on governance.
Table 1 presents potential impact of a company's ESG activities on its financial performance
over the long run.
Table 1
Impact of A Company's ESG Activities on its Financial Performance
Area of focus Activity Potential Impact
Environment • Resource management and
pollution prevention
• Reduced emissions and
climate impact
• Avoid or minimize environmental
liabilities
• Lower costs/increase profitability
through energy and other efficiencies

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• Environmental reporting/
disclosure
• Reduce regulatory, litigation and
reputational risk
• Indicator of well-governed company
Social Workplace
• Diversity
• Health and safety
• Labor-Management
relations
• Human rights
• Product Integrity
• Safety
• Product quality
• Emerging technology issues
• Community Impact
• Community relations
• Responsible lending
• Corporate philanthropy
Workplace
• Improved productivity and morale
• Reduce turnover and absenteeism
• Openness to new ideas and innovation
• Reduce potential for litigation and
reputational risk
• Product Integrity
• Create brand loyalty
• Increase sales based on products safety
and excellence
• Reduce potential for litigation
• Reduce reputational risk
• Community Impact
• Improve brand loyalty
• Protect license to operate
Corporate
Governance
• Executive compensation
• Board accountability
• Shareholder rights
• Reporting and disclosure
• Align interests of shareowners and
management
• Avoid unpleasant financial surprises or
“blow-ups”
• Reduce reputational risk
Guidelines of Corporate ESG Reporting
Literature survey was used for the selection of corporate ESG reporting indicators or disclosure
items. However, before selection of indicators, guidelines followed for the purpose are given
below:
► Public commitment to corporate responsibility and to recognize ESG standards: A
company may publicly announce its commitment to a recognized ESG standard (e.g. UNGC
& PRI, Global Sullivan Principles, and Equator Principles etc.) and there may have no
evidence to suggest that the company is in violation of its commitment.
► External Reporting: External reporting covers good public disclosure on key areas of
employee, community and environmental activities. Top reporters use the GRI framework
or reporting broad accordance with this framework and also have independent
verification/assurance of ESG performance standards.
► Linked external social and environmental reporting to internal risk management and
incentive processes: There may have evidence that the company identifies material, social
and environmental risks and introduces processes to manage and govern the company with
regard to these risks. These matters have explicit board.

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► Proactive stakeholder relations: A company may maintain proactive programs to address
interests of legitimate stakeholder groups.
► No evidence of harmful relationships: No evidence of material problematic relationships is
expected with non-financial stakeholders that could impair longer term performance.
Measurement of ESG Performance of a Company
ESG performance of a company may be objectively measured based on certain factors which
can serve as proxies/evidence to evaluate company’s governance of stakeholder relations/ ESG
performance and these relate to following indicators:
• Extent of Company’s ESG disclosure
• Company’s public commitment to corporate responsibility and corporate governance and
to recognize ESG standards
• Evidence of mismanagement or value adding management of stakeholder relations
To assess companies’ performance based on ESG parameters, evaluation process includes
following stages:
Stage 1 - Transparency & Disclosoure: Review Security of company, Annual Report,
Sustainability Reports and Other Public Disclousers.
Stage 2 - Qualitative Analysis: Analysis of Corporate data and information obtained
from Media, Civil society and Governmental Sources
Stage 3 - Company Contact: Survey, targeted questions
Selection of ESG Factors
ESG factors include risks and opportunities that businesses face based on ESG issues. There is
growing recognition that strong governance structures, appropriate executive control and high
levels of transparency are amongst the factors likely to differentiate corporate performance over
the long run. Based on literature survey and normally accepted norms, the study concentrated on
three primary indicators (Environmental, Social and Corporate Governance) and some major
sub-indicators which are presented below:
Environmental indicators encompass pollution and contamination of land, air and water;
related legal compliance issues; eco-efficiency (doing more with less resources); waste
management and recycling and reuse; water use and efficiency; energy use and efficiency;
natural resource scarcity; emission reduction; product innovation; resource reduction; climate
change and carbon emissions reduction strategies; hazardous chemicals, etc.

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Social indicators encompass the treatment of employees; health & safety; training &
development; labour conditions; child labour; human rights; supply chains; equality and
diversity; and treating customers and communities fairly, etc.
Governance indicators encompass the governance of environmental and social issue
management plus the areas of anti-bribery and corruption, business ethics and transparency.
Thus, Corporate Governance (G) disclosure indicators identify shareholder rights; audit process;
Financial and operational indicators; Board and management profile; ownership structure;
business ethics; vision and strategy, etc.
Assignment of Weightage - ESG Index
Al-Janadi et al. (2012) attempted to measure and compare the level of voluntary disclosure
practices in Saudi Arabia and the UAE by using a modified voluntary disclosure index.
The ESG Index provides an incentive to listed companies in these emerging markets to pursue
sustainable business practices through improved environmental and socially responsible
operations, as well as enhanced corporate governance systems. The purpose of the ESG Index is
to raise the profile of those companies that perform well along the three parameters of ESG
practices when compared to their market peers.
Hawkamah (2012) has launched the first ever MENA wide ESG Index in cooperation with
Standard & Poor’s with the support of the International Finance Corporation (IFC). In response
to changing economic conditions and to the practices that played a role in sparking the current
financial crisis, institutional investors are increasingly focusing on long-term risks in their
investments, and ESG factors play a significant role in making those assessments. Financial
performance indicators have traditionally marked whether or not to invest in a company. Non-
financial indicators, however, are also indicative of the future performance of companies.
It is expected that not only will the project strengthen and promote the success of
environmentally sustainable, socially responsible businesses in the MENA region, but by
attracting long-term international institutional investors looking for exposure to socially
responsible companies in emerging markets, the index will help reduce regional stock market
volatility.
India Index Services & Products Ltd. (IISL), a joint venture between National Stock Exchange
of India Ltd. and CRISIL Ltd. acts as the index's calculating agent. Sponsored by the
International Finance Corporation (IFC), and developed by a consortium of S&P Dow Jones
Indices, CRISIL, and KLD, the index represents the first of its kind to measure ESG practices
based on quantitative as opposed to subjective factors. The index employs a unique and
innovative methodology that quantifies a company's ESG practices and translates them into a
scoring system which is then used to rank each company against their peers in the Indian
market. Unlike previous indices of this kind that measure ESG parameters on a committee and
internal consensus basis, the S&P ESG India index and its quantitative scoring system offers
investors complete transparency.

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The ESG Index methodology is based on the one developed for the S&P ESG India index.
The Index covers Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain, Oman,
Jordan, Egypt, Lebanon, Morocco and Tunisia, and provides qualitative information to investors
looking to analyse these companies' sustainability performance. Index constituents are derived
from listed companies and selected by total market capitalization. This universe of stocks is
then subjected to a screening process which yields a score based on a company's ESG disclosure
practices in the public domain. Examples of disclosure channels in the public domain include
annual reports, websites, bulletins, and disclosures made on stock exchanges.
In a nutshell, the creation of the ESG Index involves a two step process:
➢ Step 1: Use of a multi-layered approach to determine an 'ESG' score for each company.
➢ Step 2: Determine the weighting of the index by score. Index constituents are derived
from the top 500 Indian companies by total market capitalization that are listed on
National Stock Exchange of India Ltd (NSE).
At the yearly rebalancing, the weight for each index constituent is set in the following manner:
• Quantitative Score: Each company is assigned a quantitative ranking based on three
factors – transparency and disclosure on ESG as per the company’s published
information.
• Qualitative Score: The top 150 companies with the highest quantitative score are
selected for qualitative scoring on the basis of independent sources of information such
as news stories, web sites, and CSR filings.
• Composite Score: A composite score is calculated for each company by summing the
qualitative and the quantitative score. To ensure invest ability, liquidity may be used as a
secondary threshold in the selection of index constituents: stocks with the highest scores
are selected provided they have traded a minimum of Rs. 20 billion in the last 12
months.
Recent study (June 29, 2012) on assigning weightage on ESG issues shows that industry wise
there is wide variation in assigning weight for index. The maximum weighting (12.8%) in ESG
Index is provided to banking sector, whereas minimum weighting is very low i.e. 1.5%, which
is assigned to sectors like Finance housing, Textile products and Pesticides and agrochemicals.
On the contrary, moderate weighting (6.2%) in ESG index is perceived in case of power sector.
Figure 1 presents industry wise variation in assigning weight for ESG index.

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[Source: India Index Services & Products Ltd. (IISL), S&P Dow Jones Indices LLC and/or its affiliates, 2012].
Recent study (2012) on company wise variation in assigning weight for ESG index explored
that there is a positive correlation of assigning weight with market capitalization. The study
found that 2.93% weightage for ESG Index has been assigned for company under power sector
being in top most position under listed companies of BSE and having market capitalization of
more than Rs. 18,000 billion, whereas banking sector being in 10th
position in listed companies
of BSE and having market capitalization of more than Rs. 15,000 billion have weightage of
2.41% for ESG Index (Table 2).
Table 2
Variation in Assigning Weight for ESG Index among Top 10 Companies
Industry Float Adjusted
Market Cap.
(INR Billion)
Index Weight
(%)
Power 18843.88 2.93

10. 10
Cigarette 17432.12 2.71
Construction 17387.06 2.70
Engineering 17116.23 2.66
Refineries 16945.75 2.63
Finance 16936.68 2.63
Financial Institution 16723.96 2.60
Computer-software 16208.55 2.52
Automobile-4Wheelers 15559.40 2.42
Banks 15509.28 2.41
[Source: India Index Services & Products Ltd. (IISL), S&P Dow Jones Indices LLC
and/or its affiliates, 2012].
Conclusion
Though few empirical studies have examined ESG reporting practices in global perspective, yet
in India such kind of research works are only a few. Hardly a few studies have looked at ESG
disclosure practice, its indicators, evaluation of corporate performance based on such ESG
indicators and its operationalizion. A number of leading companies have developed innovative
practices for effective ESG disclosure. However, some target stakeholder groups for such
information (e.g. investors and analysts, campaigning NGOs, consumers) still often state that
their needs are not adequately met. Even there being no regulatory requirement, ESG
disclosures are not structured. But it is the fact that there is enough scope of improvement of
corporate performance through ESG disclosure, for which objectivity and informative reporting
is the dire need. Multitude of directives regarding ESG reporting pose a challenge on having a
simple and credible framework for analyzing ESG initiatives of the reporting companies. It
must also be appreciated that given the diversity of industries it is unlikely that there could be a
one-size-fits all structure. However, it would be highly expected that ESG disclosure would not
only demonstrate companies’ committed approach towards the community and society at large,
but also drive a company towards gaining competitive advantage in long run.
Reference
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Launch, The Institute of Corporate Governance, Dubai, Press Release, January 4.
Hong Kong Exchanges & Clearing Limited (2011), Consultation Paper - Environmental, Social
And Governance Reporting Guide, December.

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