When talking about environmental, social, and governance (ESG) factors, people usually focus on the environmental one since climate change is a clear and present danger. But, maybe they should pay attention to the governance record of India Inc. too.

According to a recent sustainability report from Crisil, 67 per cent of the controversies around the 586 companies covered were governance-related. Of the governance-related controversies, 59 per cent of the adverse news was because of regulatory action on the companies.

Most of this involved Sebi penalties, which were levied for violation of market norms, misuse of client funds, manipulation of global depository notes issuance, default in compliance with Regulation 33 of the Listing Obligations and Disclosure Regulations (LODR) and delayed disclosure. Regulation 33 of LODR is on preparing financial results, including the accounting standards to follow and the authentication of the results.

The lending sector saw the highest number of governance-related controversies, with 18 per cent of the total.

“This is due to stricter regulatory requirements and penalties by the regulator in case of non-compliance,” said Miren Lodha, Director, Crisil Research. The controversy in the sector resulted from penalties imposed by the regulator for non-compliance and fraud in loan accounts.

Textiles, consumer durables and electricals, hotels, healthcare, and heavy engineering were among the sectors that saw the least number of controversies, said Lodha.

While there were a high number of controversies reported from the lending sector, the report authors noted that the leaders in this space scored “very high” in overall governance and the sector average was weighed down by the poorer scores of PSU lenders. There was a significant difference–of 50 points–between the maximum and minimum scores.

On the whole, in the Crisil report, India Inc. scored the highest for governance standards and the least for environmental compliance. Its average ESG score was 54, with 66 as the average G score, 50 as the average S score, and 45 as the average E score. This is because there are “more evolved regulatory obligations in terms of disclosures and governance practices."

In India Inc, the IT and paints sectors made the highest G scores. “This could be attributed to better disclosures, good management track record, i.e., financial performance vis-à-vis CEO and KMP remuneration trajectory, better gender diversity on the Board, and a high share of independent directors for companies in these sectors,” it stated.

Source: Money control

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