Companies in India are increasingly focusing on the importance of environmental, social and governance (ESG) issues following the coronavirus pandemic, and their compensation committees can play a crucial role in taking this agenda further, according to global advisory firm Willis Towers Watson.
Rewards and incentives could be incorporated in a company's ESG matrix to achieve the larger agenda, and companies must chalk out a plan that drives the right ESG behaviour in the long term and reward the management for the same, Willis Towers Watson said.
"The incentivising achievement of the ESG matrix must be done in a top-down manner. Boards need to set the right expectations for the management and reward them for delivering the desired performance while demonstrating the right behaviours," said Rajul Mathur, consulting head (talent and rewards), India, Willis Towers Watson.
Mathur further noted that one big lever that companies must use to drive this agenda is through "executive compensation".
"Boards need to set the right expectations for the management and reward them for delivering the desired performance whilst demonstrating the right behaviours. One big lever that they must use to drive this agenda is through executive compensation," he said.
For example, how significantly the management can reduce their carbon footprint (direct and indirect) in terms of tCO2e (or tonnes of CO2 equivalent) could be one of the parameters to drive incentivisation, he said.
"But, this is not as simple as it might seem to appear. Designing the right LTI (long-term incentive) plan with stretch but realisable targets is critical and dependent on a number of considerations - a plan that drives right ESG behaviour in the long term and rewards the management for the same," he noted.
According to Willis Towers Watson's Global Executive Compensation Trends, ESG has become a critical business consideration, impacting companies' cost of, and access to, capital.
ESG goals and outcomes directly impact the company's reputation with the public and employees, and often play a role in attracting and retaining a new generation of talent.
Companies with strong ESG practices have been found to deliver more sustainable returns, including higher levels of value creation and risk mitigation.
Investors and stakeholders now believe that modern-day corporates should have a moral responsibility towards the environment and society at large, and are demanding greater accountability and transparency in this regard.
In India, ESG reporting was limited through BRR (business responsibility reporting) and CSR (corporate social responsibility) reporting. However, in 2021, the BRR committee took the next steps and recommended a BRSR (Business Responsibility and Sustainability Report) reporting, Mathur said.
"However, more needs to be done in India and some of the global frameworks need to be incorporated," he noted.
He further said Indian companies are showing gradual progress from a reporting perspective. Citing the CDP India Report 2020, he said the report indicated that 220 Indian companies disclosed climate change goals to investors and customers, an increase of 17 per cent over the previous year.
For the first time, four Indian companies -- Hindustan Zinc Limited, IndusInd Bank, Mahindra & Mahindra and Tech Mahindra -- made it to the CDP A list. Additionally, large Indian corporate houses Reliance Industries and JSW Energy have taken voluntary commitments to go carbon-neutral by 2035 and net-zero by 2050, he noted.
These are encouraging steps, but India Inc has some way to go to come at par with their global counterparts. In India, 52 companies have taken SBTI (Science-Based Target Initiatives) whereas there are 200 companies in the US, 128 in the UK, and 107 in Japan.
"Having said so, India stands well among its counterparts in emerging economies," he noted.
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