New Delhi: In India, the Covid-19 pandemic has brought about an unprecedented lockdown, and in these uncertain times, the shareholders and stakeholders of companies are on a lookout for a solution for their challenges. The economic impact of the lockdown can be felt across all industries, and some are even forced to pack their bags as a pandemic enforced recession seems to be kicking in. As a result, the leaders are at an impasse – how to troubleshoot the current scenario in everyone’s favor?
For over 50 years, it has been believed that the companies serve just the shareholders. However, in 2019, plenty of grand statements were issued by various business leaders with one key idea in all of them – ‘stakeholder capitalism’. The two words – ‘Stakeholder’ and ‘Capitalism’, when put
together, make up a system in which corporations are designed and directed to serve interests of all its stakeholders. Stakeholder capitalism is all about keeping everyone’s interest at heart – while earning substantial capital. The elements which matter within a company, like its customers, employees, suppliers, the environment, the government, the community at large – all need to be thought about especially when it comes to the kind of strain a pandemic, like Covid-19, or any other emergency might enforce.
Back in 2005, a new term ‘ESG’ was coined in a study known as “Who Cares, Wins”. ESG stands for the environmental, social and governance factors, and these factors have come to play a very important role in responsible investments since its inception. During the annual meet of the World Economic Forum at Davos in January 2020, it was the former Prime Minister of New Zealand, Helen Clark, who stated that companies who would not take ESG and the elements related to it seriously might end up suffering financially. But why would that happen? It is solely because the consumer is now more aware, and has now begun making increasingly conscious choices. They want to know the whole value chain – whether the product is sustainably produced, or if the labor behind it was exploited. The value of stakeholder capitalism needs to be realized by the world leaders.
There are various companies who analyze the data worldwide and are working diligently towards calculating ESG scores by using data made available in the public domains. MSCI, Refenitiv, Thomson Reuters and CSR Hub are such companies, which have not only attempted to quantify ESG data, but are also successful in providing insight into the same with very informative reports which have been made available on the internet. Companies like Bettson AB, an online gambling company, have been publishing their ESG report since 2017 and has managed to score an AAA rating based on MSCI ESG ratings. The methods of calculating ESG scores have been provided, but not been officially accepted, and the various barriers are still in the way, delaying the inception of the same.
Stakeholder Capitalism, ESG And The Indian Perspective
Since the applicability of the Corporate Social Responsibility Law back in 2014, there has been a constant development in the progress of India’s landscape of ESG investment. It was after the CSR law was mandated that the Reserve Bank of India too updated the priority sector lending
requirements to include social infrastructure and renewable energy. Apart from that, in 2018, the Bombay Stock Exchange published documents outlining the ESG disclosures, followed by NIFTY 100 ESG Index also being released. India’s National Action Plan on Business and Human Rights is also in the process of being developed by the Ministry of Corporate Affairs (MCA). The Indian market has also seen a number of announcements of ESG Funds, like SBI Magnum Equity ESG Fund (May 2018), Avendus India ESG Fund, Quantum India ESG Equity Fund and many more. There are quite some things happening which seem promising to strengthen the ESG Scores of our country, but the definite path still seems unclear.
In our opinion, the government must mandate a way in which the ESG score can be calculated in India, so that data can become comparable across the board for all the companies. As on date, there are various organizations which have suggested ways on how to calculate the ESG scores, yet every company uses a different matrix, conclusively making a very variable data. Hence, our first recommendation is that the government should propose a law mandating the points on which ESG scores can be calculated and evaluated.
If implemented, the ESG score can be verified by the independent auditor or can be made a part of the annual audit, and the following actions could be considered –
1. Once the data becomes comparable, various incentives can to be introduced for the corporate sector of India, so that ESG goals become attractive for the industries and corporations.
2. Income-Tax rebates can be provided to companies with high ESG scores. As 25-30% is the income tax rate for domestic companies in India, the government could give a rebate of about 2% to companies who have a good ESG score but also make it mandatory to use half of this rebate to be reinvested to their ESG activities.
3. The banks may provide financing to companies with good ESG scores at a reduced rate of interest and half of this benefit that the company derives should be used by the company for reinvesting in ESG goals.
4. The companies availing export incentives in India get duty drawback, but with the ESG scores the export incentive rates can be increased on the same condition that a minimum of 50% of the benefit is to be reinvested to ESG goals.
5. Licenses, like the pollution control license, can be given an extension, and can either be renewed automatically or the duration of the same can be increased for companies with a high ESG score from 5 to 10 years.
6. A reduction in the rate of Tax Deduction at Source can be provided to companies with high ESG scores by the government.
Stakeholder Capitalism – The Conclusion
It is with every generation that a trend is recognized which unfortunately seems to be ahead of them or their time. The Stakeholder Capitalism could be that trend for the current generation, but as the world is adapting to new things every day, there is still hope. A responsible, sustainable human being trying to do good for the society might not be able to yield the benefits just yet, but with the world having entered an era of a pandemic, of transformation in how they live, maybe there is hope of the infrastructure of the society becoming fundamentally ESG goal oriented as well.
In the end, as quoted by Klaus Schwab, “Coronavirus is the ultimate litmus test for stakeholder capitalism”. It is indeed proving to be one, and only time shall tell if stakeholder capitalism is the revolution we have all been waiting for.
This is an authored article written by Rahul Sapra (CA, Pursuing PGDM (EMP) from MDI Gurgaon) and Meghna Sapra (Student of PhD. (Human Resource Management) at IIS University, Jaipur)
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