Sustainability

Final Report

Project Title: ESG Reporting

Group No-01
Himanshu 22A1HP015
Shibbudevi Hariprasad 22A1HP017
Subodh Mohapatro 22A1HP004
Riya Awasthi 22A1HP010
Vedanti Prashant 22A1HP019
Saisha Ayachit 22A1HP018

Submitted to-Prof. Tulika Sharma

Institute of Management Technology Hyderabad

INTRODUCTION: Environmental, Social, and Governance (ESG)
Environmental, Social, and Governance is referred to as ESG. Investors use this set of
standards to assess how well a firm is performing in these three areas. Due to investors'
increased awareness of the potential effects that businesses may have on society and the
environment, ESG investment has grown in popularity in recent years.
Environmental factors encompass an organization's effects on the environment, including
waste management, water usage, and carbon footprint. A company's influence on society,
including its employment standards, human rights record, and community involvement, is
referred to as a social factor. A company's internal policies and practices, such as its board
structure, CEO compensation, and shareholder rights, are examples of governance elements.
Assessing a company's performance in these categories can be done through ESG analysis.
Investors may find companies that are well-managed and positively affect society and the
environment with their assistance. Investors can also benefit from ESG analysis by
identifying companies that might be vulnerable to risks associated with governance, social, or
environmental difficulties.
There are various approaches to ESG analysis. Using ESG ratings is one strategy; these come
from rating organisations that assess businesses according to their ESG performance. Using
ESG data, which is gathered from news stories, company reports, and social media, is an
additional strategy.
Investors can utilise ESG analysis to
help them make well-informed
investing decisions. Investors can find
companies that are well-managed and
positively impact the environment and
society by analysing a company's
ESG performance. Investors can
identify companies that may be
vulnerable to risks relating to
environmental, social, or governance
issues by using ESG research.
In conclusion, ESG analysis is a
crucial tool for investors who wish to make wise financial choices. Investors can find well-
managed companies that positively benefit society and the environment by assessing a
company's performance in environmental, social, and governance domains. Investors can
identify companies that may be vulnerable to risks relating to environmental, social, or
governance issues by using ESG research.

The three main obstacles to ESG investment are data scarcity, performance
issues, and greenwashing worries.
Investors' top concerns with ESG funds, according to the Capital Group's 2022 ESG survey,
are greenwashing, lack of data, and performance. The verdict is still out on the first two,
which are sort of connected. Simply put, the data is currently insufficient for us to render a
definitive decision in the ESG vs. non-ESG performance controversy.

Greenwashing is a hidden danger, particularly as an increasing number of businesses promote

ESG principles to boost their public perception. In this sense, the absence of standardised
rating systems is not helpful. But fewer investors (2022) believed that asset managers
primarily employed environmental, social, and governance (ESG) as a sales tactic (55% vs.
59% in 2021). A Harvard ESG worldwide analysis from 2022 indicates that the Asia-Pacific
area is seeing the biggest decline (48% compared. 59% in 2021).
Tariq Fancy, a former director of sustainable investments at Blackrock, believes that Wall
Street is greenwashing the financial industry, turning it mostly into PR, and diverting
attention away from the issue of climate change.

Green Bonds, Sustainability Bonds and ESG

Green Bonds: Providing Funds for Environmental Projects
Green Bonds are debt securities created specially to finance environmentally beneficial
projects. Green Bond issuers pledge to use the money earned for clean transportation,
sustainable agriculture, energy efficiency, and renewable energy initiatives. Green Bonds
appeal to investors not just for their financial gains but also for their ability to improve the
environment.

Sustainability Bonds: A More Comprehensive Method

Sustainability Bonds include a wider range of initiatives, whereas Green Bonds are limited to
environmental projects. These bonds provide funding for initiatives that improve society and
the environment, including affordable housing, healthcare, and education. Investors looking
to make a bigger difference in a variety of sustainability-related areas are drawn to
Sustainability Bonds.

Sustainable Practices in Investments: An ESG Perspective

Investors assess a company's ethical and sustainable performance using Environmental,
Social, and Governance (ESG) criteria. Investors take into account a company's treatment of
workers, environmental effect, and standard of governance. Investment decisions are guided
by ESG standards, which promote capital allocation to companies with excellent
sustainability policies.

Key Features of Green Bonds, Sustainability Bonds, and ESG Integration:

 Transparency and Reporting: Green and Sustainability Bond issuers frequently pledge
to provide transparent reports on the allocation of funds and the results of their
projects. Companies that integrate ESG disclose their sustainable policies, giving
investors important information to help them make decisions.
  Risk Mitigation: Long-term risk mitigation can be facilitated by funding socially and
environmentally conscious initiatives. Companies and bond issuers can better handle
regulatory changes, market fluctuations, and social trends by aligning with sustainable
practices.
 Investor Demand: As social and environmental issues gain more attention, there is a
greater need for sustainable investment opportunities. Investments in Green Bonds,
Sustainability Bonds, and ESG-integrated funds draw people who value both profits
and good social effects.

Challenges and Prospects for the Future:

 Standardization: Investors attempting to evaluate the social and environmental impact
of their investments face difficulty due to the absence of established standards for
Green and Sustainability Bonds. To solve this issue, efforts are being made to set
industry standards.
 Market Growth: Despite obstacles, the market for sustainability and green bonds has
expanded significantly in recent years. Maintaining this momentum will need ongoing
cooperation between businesses, financial institutions, and governments.
 Evolution of ESG Practices: It is anticipated that ESG integration will change, with a
greater emphasis on quantifiable impact and the creation of more precise measures for
evaluating sustainability performance.

ESG AUDITING
ESG Performance Is Business Performance
Stakeholder attention has long been focused on the environmental aspect of ESG, but social
and governance issues have increasingly gained prominence. Even private businesses are now
scrutinized by the general public. Public inspection is available for any number of issues,
including ethics, diversity and inclusion, labor standards, human rights, material sourcing and
supply chain, access, and data security and privacy.
Not unexpectedly, the need for ESG responsibility, transparency, and assurance is rising as a
result of these shifting stakeholder expectations. Regulators are starting to create and execute
more rigorous ESG performance standards in the US and around the world. However, a
growing number of stakeholders are pressuring companies to use ESG to create value.
Integrating ESG risk and compliance, internal audit is the final line of defense.
In enforcing discipline and controls around material ESG risks, take into account the audit
plan. Internal audit is in charge of assessing pertinent risks and controls, providing advice on
ESG reporting and confirming actions taken to reduce risk. Additionally, internal audit is
essential for anticipating and coordinating activities with emerging ESG risks, strategies, and
organizational goals. It also provides advice to the business on its broader risk management
skills.
GRI
GRI
GRI operates as an independent, non-profit organization, delivering globally recognized
sustainability reporting standards. These standards furnish organizations with a structured
framework to transparently disclose their environmental, social, and governance impacts,
facilitating comprehensive and comparable assessments.

GRI standards serve as a foundation for ESG reporting: Encompassing a broad spectrum of
ESG subjects, including climate change, resource utilization, human rights, labor practices,
and governance, the GRI Standards offer a framework for companies to ensure the
comprehensiveness and credibility of their ESG reporting.
ESG investors rely on GRI data: With a growing number of investors incorporating ESG
considerations into their investment strategies, GRI data becomes a valuable resource. It
furnishes ESG investors with comparable information regarding the sustainability
performance of companies.
GRI plays a pivotal role in shaping ESG standards: As a frontrunner in sustainability
reporting standards, GRI actively contributes to the development of ESG standards. The GRI
Standards serve as a cornerstone for various other ESG reporting frameworks, including the
Sustainability Accounting Standards Board (SASB) standards.

GRI and ESG share close ties in various aspects:

GRI provides a range of reporting standards, comprising the Universal Standards (suitable for
all organizations) and Sector Standards (customized for specific industries). As of December
2023, these include:

 3 Universal Standards: Released in 2016, 2021, and the updated version in June 2023.
 35 Sector Standards encompassing various industries such as mining, finance,
healthcare, and technology.
This showcases the comprehensive coverage of ESG aspects by GRI, granting organizations
the flexibility to select standards that align with their specific needs.
Adoption:
The fact that GRI Standards are utilized by over 10,000 organizations in more than 100
countries holds significant weight. It signifies the broad acceptance and implementation of
GRI's sustainability reporting framework across various industries and geographical regions.
This notable adoption rate indicates a growing acknowledgment of GRI's pivotal role in
standardizing and elevating sustainability reporting. It simplifies the process for stakeholders
to make comparisons and assess the performance of organizations.
Reporting:
The extensive collection of over 85,000 reports within GRI DDB underscores the wealth of
data available on global sustainability practices. This data serves a crucial purpose in:
Monitoring trends and advancements in ESG reporting: Analyzing the data can unveil
insights into the ESG topics gaining prominence, prevailing reporting practices, and areas
where enhancements are required.
Evaluating performance through benchmarking: Organizations can gauge their performance
by comparing their data with that of others in their sector or region, identifying strengths and
areas for improvement.
The GRI DDB provides an extensive resource of data for researchers to delve into various
dimensions of sustainability reporting. Here are some recent trends and corresponding figures
extracted from the database:
Climate Change:
In 2022, climate change was mentioned in 58% of reports, underscoring its escalating
significance as a reported ESG concern.
Greenhouse gas (GHG) emissions data was disclosed in 25% of reports, indicating a
heightened emphasis on quantifying environmental impact.

Resource Use:
Water management was addressed in 32% of reports, revealing an increasing focus on a vital
resource.
Circular economy practices were mentioned in 18% of reports, signaling a shift towards
resource efficiency and waste reduction.
Diversity and Inclusion:
Data on gender diversity in the workforce was included in 45% of reports, showcasing
heightened transparency on gender equality.
Information on employee training and development programs was disclosed in 38% of
reports, indicating a focus on upskilling and talent development.
Human Rights:
Human rights due diligence practices were mentioned in 30% of reports, indicating a growing
awareness of responsible sourcing and supply chain management.Data on community
engagement initiatives was included in 15% of reports, highlighting endeavors to address
social and environmental challenges in local communities.
Governance:
Anti-corruption measures were addressed in 62% of reports, reflecting the importance placed
on ethical business practices.Stakeholder engagement strategies were mentioned in 48% of
reports, suggesting efforts to involve stakeholders in decision-making processes.
Institutional Investors, Impact Investors, and ESG
Impact investors are a growing force in the financial world, motivated by a dual purpose:
generating financial returns while simultaneously creating positive social and environmental
impact. They go beyond traditional, purely profit-driven investing, actively seeking out
investments that address critical challenges like climate change, poverty, and inequality.
Institutional investors are large organizations that manage money on behalf of others, such as
pension funds, insurance companies, and endowments. They are primarily focused on
financial returns and risk management. But, they have also started understanding the impact
of ESG investing as it helps to mitigate risk, enhance long-term returns, and meet evolving
client demands.
The financial industry is seeing a convergence of investment forces, as impact investors
actively seek out quantifiable positive impact in addition to financial returns, and institutional
investors are increasingly incorporating ESG (Environmental, Social, and Governance)
principles. This study examines this intersection, highlighting significant developments,
chances, and difficulties that are backed by insights gleaned from data.
1. ESG Integration Surge: According to the US SIF Foundation, institutional investor
allocation to ESG-focused funds has tripled since 2018, and it will reach 15% in 2022.
This increase is caused by things like:
 Pressure from regulations: Investors are compelled by policy changes—such
as the EU Sustainable Finance Disclosure Regulation—to take ESG risks and
opportunities into account.
  Climate change concerns: Investments in sustainable solutions (such as
renewable energy) are being spurred by the financial implications of climate
change.
 Investor preferences are changing: Investors, especially younger ones, are
looking for investments that reflect their values.
2. Momentum in Investing: With a compound annual growth rate of 26.8%, the impact
investing market has grown to a size of over $1 trillion (Global Impact Investing
Network). This increase shows that investors are willing to make bets that will have a
quantifiable impact on the environment and society.
3. Convergence and Collaboration: Institutional and impact investors are working
together more and more, even though their goals are different. For instance,
BlackRock and the MacArthur Foundation collaborated on a $1 billion fund intended
for climate solutions and renewable energy. This partnership expedites sustainable
solutions and opens up new investment opportunities.
4. Obstacles and Missing Data: Obstacles still include long investment horizons,
greenwashing, and a dearth of impact investment options (just 1% of global assets
under management are impact-focused). It is imperative to address these issues, for
example, by implementing longer-term investment strategies and standardizing impact
metrics.
 Greenwashing: Only 10% of ESG funds have strong ESG integration practices, while
40% have weak practices.
 Impact measurement: 80% of impact investors struggle to measure the impact of their
investments.
 Long-term investment horizons: Most institutional investors lack the internal
expertise to manage long-term ESG investments

ESG and Integration with Business

ESG Rating
An organization's environmental, social, and governance performance is gauged by its ESG
grade. ESG ratings are given by several agencies and organizations to assist stakeholders and
investors in evaluating a company's ethical and sustainable business practices. A score of less
than 50 is regarded as relatively low, whereas a score of more than 70 is regarded as good.
These values normally range from 0 to 100.
ESG Scores
ESG scores can be used as a foundation for evaluating funds and corporations based on a
variety of criteria, including labor policies and carbon impact. A sizable percentage of
publicly traded funds and securities have an ESG score, which is the result of combining and
weighting these many components.
It is imperative to acknowledge that ESG scores are not standardized, as they originate from
many suppliers with their own unique scoring schemes and evaluation methodologies.
Furthermore, the E, S, or G components may be given more weight by certain rating
agencies. Different rating agencies may assign different scores to the same company because
of this lack of standardization.
Components of ESG Scores Consists of:
It is classified into three main categories:
1. Environmental Issues
 Climate Change
 Ecological Footprint
 Resource Use
 Pollution
2. Social issues
 Health & Safety
 Customer Responsibility
 Community Impact
 Labour Standards
3. Governance Issues
 Shareholders Rights
 Risk management
 Tax Transparency
 Anti-Corruption

ESG Rating Agencies

Third-party businesses that develop ESG grading systems are known as ESG rating agencies.
Every organization evaluates businesses using a different process and set of standards. While
some rating organizations, such as MSCI, categorize businesses as leaders, average, or
laggards, others utilize a 0–100 scale.

MSCI ESG Research: A firm that is classified as a "leader" (AAA and AA) is said to be at the
forefront of its sector when it comes to managing the biggest ESG risks and opportunities.
Companies classified as "average" (A, BBB, or BB) have a mediocre or unremarkable history
of managing ESG risks and opportunities in comparison to their industry counterparts. A
"laggard" (graded B or CCC) falls behind its sector due to its high level of exposure and
inadequate handling of substantial ESG risks.

Pure ESG Active return contribution

When we examined return drivers for businesses with various MSCI ESG ratings in 2022, we
saw that several systematic factors—like nation, industry, or style—had reversed the
direction of their contribution from previous years. This is not surprising, since we have
observed a rotation in the performance of certain style characteristics (like value) and sectors
(like energy and IT) over the year.
Corporations with higher MSCI ESG Ratings outperformed lower-rated corporations in terms
of returns when the effects of industries, nations, and styles are considered. Even while
companies rated A or better had a decrease in the extent of their ESG-related outperformance
in 2022, they nevertheless maintained their long-term historical track record.