Your ESG Score Influences your Reputation Quotient

A recent McKinsey report on valuing ESG programs caught my attention; especially given the current mood to value consciousness and sustainability. This McKinsey Global Survey on valuing ESG programs highlighted that 83% of C-suite leaders and investment professionals indicate that they would be willing to pay about a 10% median premium to acquire a company with a positive record for ESG issues over one with a negative record. This encouraged me to read more about this trend and I stumbled upon another communication by the world’s largest fund manager, BlackRock that issued guidance to its fund managers stating that ESG issues should form a core part of all their investment decisions and not just for ESG-focussed funds. “Integrating ESG information, or sustainability considerations, should be part of any robust investment process,” the communication said. And then there are reports like S&P Global’s industry report card that goes on to highlight the implications of each of the components of ESG i.e. Environment, Social and Governance practices on various industries that influence the ratings of the companies operating in that industry. Such reports and actions clearly point out that there is a direct correlation between the ESG practices of a company and its reputation. A survey by State Street Global Advisors (SSGA) in 2019 indicated that more than one-third (35%) of pension fund respondents to the survey included reputational risk as a top-three factor driving ESG investing at their institution.

This clear connection intrigued me to look at some of the companies that are battling reputational risk and their ESG focus. Top of mind recall is Volkswagen or VW, the German automaker and its infamous emissions-cheating scandal. It cost the company a fortune by way of penalty, loss of leadership, and irreparable reputational damage. Closer home and the most recent case of LG Polymers is another disappointing example. The devastating impact that the gas leak has caused is likely to affect the lives of the employees and the local people for a long time. 5 villages were highly affected resulting in deaths and critical health conditions. As per the National Disaster Response Force (NDRF) after being exposed to the gas leak, 11 people died and more than 1000 people fell sick the same day. While the company argues that it was following all the laws outlined, there are also allegations that the plant did not have the necessary environmental clearances from relevant authorities for several years. While the details remain unclear and the matter is sub-judice, it is evident that the ‘Vizag Gas Leak’ has had a severe impact on the reputation of the company; not only LG Polymers India but also the global entity and the ‘LG’ brand as a whole.

Lack of sensitivity towards the environment as well as the society was evident in both cases, which by default puts a question mark on its governance practices. In fact, the ESG parameters and the weightage of each of them differ for every industry and even company. For instance, Environmental and Social Risk will be significantly lower for the banking or media industry versus metal & mining industry or chemical industry. Drilling deeper, the media industry will have a higher Social risk than the banking industry, while the metal & mining will have a higher Environmental risk. Whatever be the composition, it is important for the companies to be mindful and make them an integral part of business operations. Especially because increasing awareness amongst stakeholders, varieties of platforms that give voice to these stakeholders, and stringent regulations ensuring adherence have made ESG practices a central theme of the reputation risk. Unless it is accepted and implemented as a core part of business operations, highly likely that there could be slips. The price of reputational loss to be paid after that may last for generations; lest we forget the Union Carbide case, the infamous Bhopal gas tragedy.

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Mitu Samar

Mitu Samar, runs a company called ‘Eminence’, that works with renowned brands in India to build, establish or protect their reputation. She serves as an Independent Director on the boards of Times group Companies. Before turning an entrepreneur, Mitu served as Director, Communication and Brand Management at CRISIL and also headed the marketing and communication role of S&P in South Asia. Her professional experience includes stints with companies like Aditya Birla Financial Services Group, ICICI Prudential MF & GE Shipping.