'ESG is actually a concept which cannot be applied effectively in the very short run.'
The Financial Stability Report (June 2023) highlighted two challenges arising from climate-related events: Recalibrating business strategies for green transition, and strengthening resilience.
Sankar Chakraborti, chairman of ESG Risk Assessments & Insights, spoke with Raghu Mohan/Business Standard on the green road ahead.
The Reserve Bank of India's survey on climate risk and sustainable finance in July 2022 said that most banks didn't have an ESG (environmental, social, and corporate governance) policy in place. Why so?
The ESG concept is relatively new compared to conventional risk-management frameworks.
We also don't have enough data to establish the impact of ESG factors on credit.
We need to have at least two economic cycles' data whereby you can establish the correlation.
But at least two or three banks I am working with very closely are making very quick progress.
One part is being able to predict major credit failures using ESG principles; the other is to understand existing exposures.
For that, banks need to build a very detailed taxonomy, which is currently missing in India.
In green finance, which agency is to validate or certify it?
About one and half years ago, the Securities and Exchange Board of India said that for a public issue, a company had to appoint a monitoring agency for carrying out this activity; and rating agencies were eligible.
There's a framework in place, but we are yet to see how well it's working because this is a new initiative.
At this point of time, I will not be able to tell you if rating agencies have caught the misuse, or misdirection of funds.
But you can expect this to happen over the next couple of years.
Do you think there will be enough takers for green deposits?
In the short term, ESG may not naturally give you the indication that it's economically viable.
This is where I think the understanding of the concept is a little convoluted in people's minds.
Let us broadly say that ESG means doing business the right way.
In the short term, it may not give benefits.
Paying taxes on time has a long-term positive yield for a company - you will avoid penalties, reputation risks, and so on.
But if you are able to avoid tax and get away with it, in the short run, it benefits the company.
ESG is actually a concept which cannot be applied effectively in the very short run.
When a bank raises green deposits, the objective is that it will be directed towards projects which are ESG-compliant.
Now, it may not naturally mean that these deposits will have better returns.
If being ESG-compliant means a higher interest rate (being offered on deposits) then ESG as a concept doesn't make sense.
If such funds are not cheaper, then how will the transition happen from non-ESG fuels and businesses to what is ESG-compliant? If banks are going to charge a higher interest to companies for ESG-compliant projects, and thereby, provide a higher interest rate on green deposits, it's not going to work.
So, there has to be an incentive mechanism which banks, or the government has to figure out for this to happen.
I look at ESG as a more holistic phenomenon.
Look, for example, at the ESG funds out there.
A lot of these are nothing but IT (information technology funds).
In some cases they actually have a lower ESG score than a non-ESG fund.
The question, therefore, is: If we have to make a huge transition towards ESG compliance, is it possible to create separate instruments and direct resources towards them?
At the societal level, what will it take to get a buy-in?
We have to prove that ESG is ultimately a sensible thing to do. Indian society is inherently efficient.
However, with more and more western influence, you know things are changing.
On the one hand, our children are extremely aware about climate change, but on the other, the ability to recycle is going down.
I think, at a societal level, change can only come when people actually see the benefits from practising ESG.
If it's going to make your life more uncomfortable, more miserable, and more expensive, I don't think people will absorb it.
We have to create disincentives. Take water: it's very easy for the government to make water more expensive when they are not used in an efficient manner.
Feature Presentation: Aslam Hunani/Rediff.com