Textile sector faces ESG challenges

Subject: Economy

Section: National Income

Context:

The textile industry is coming under greater Environmental, social and governance (ESG) scrutiny.

Facts about Textile Industry in India:

The Indian textile and apparel market is currently estimated at over $150 billion, of which, export constitutes over $40 billion.
A recent report pointed out that the global textile and apparel trade is set to reach $1,000 billion by 2025-26 and that in the same period the Indian textile and apparel market will reach $250 billion.
India holds a 4% share of the $840 billion global textile and apparel market, and is in fifth position.
It contributes 3% to Indian Gross Domestic Product, 7% of Industrial Output, 12% to the export earnings of India and employs more than 21% of total employment.
India is also the second largest producer of silk in the world and 95% of the world’s hand woven fabric comes from India.
India is the 6th largest producer of Technical Textiles with 6% Global Share, largest producer of cotton & jute in the world.

About ESG:

ESG stands for: “Environmental, Social and Governance”.
The term ESG was coined by the Global Compact in 2004.
ESG is described as a set of principles (policies, processes, metrics, etc.) that organizations apply to limit negative impact or enhance positive impact on the environment, society and governance bodies.
It refers to a set of non-financial measures that reflect a corporation’s impact on the environment and society.
ESG can be considered a subset of sustainability, which is defined by the United Nations World Commission on Environment and Development as ‘meeting the needs of present generations without compromising the ability of future generations to meet their own needs’.
Investors and stakeholders look at three key factors when evaluating a company’s sustainability and social impact under ESG.
Environmental Factors: This relates to the company’s impact on the natural environment, including energy use, greenhouse gas emissions, waste management and resource consumption.
Social factors: This refers to the company’s impact on society, including relationships with employees, customers, suppliers and communities.
Governance Factors: This focuses on the company’s management and decision-making structures, including board composition, executive rules and transparency.

Functioning of ESG:

ESG serves as an evaluation technique that takes into account environmental, social and governance issues. In the private sector there is a set of ESG criteria that are used to evaluate company risks and practices.
ESG frameworks are important for sustainable investing because they can help individuals or other corporations determine whether a company is aligned with their values, as well as analyze the ultimate value of a company for their purposes.

Significance of ESG:

ESG covers issues that are, for the most part, long-term considerations.
ESG risks are similar to other business risks in that they are important to understand, identify, quantify and manage, but some ESG risks have the added complexity of being unpredictable.
Another characteristic of ESG risks is that they can be very costly.
Some examples of ESG risk management include assessing climate change risks to regular operations, assessing workplace culture, company diversity, etc.
ESG risk management supports sustainable, long-term growth by actively evaluating potential issues.

Difference between ESG and CSR:

India has a strong Corporate Social Responsibility (CSR) policy which obliges corporations to engage in initiatives that contribute to the welfare of society.
This mandate was codified into law with the passage of the 2014 and 2021 amendments to the Companies Act of 2013 which required:
- Companies with a net worth of ₹500 crore or a minimum turnover of ₹1,000 crore or a net profit of ₹5 crore in any financial year.
- Companies spend at least 2% of their net profit in the last three years on CSR activities.

Implications for Indian companies:

ESG will play an important role in expanding risk management with thorough due diligence.
Companies wishing to maximize their opportunities in the global economy need to adapt to these new requirements and adjust their organizations accordingly.
Indian companies looking to expand their ESG risk management need to conduct thorough due diligence that can stand up to scrutiny.

It is the practice of making investments that not only generate financial returns, but also create positive social and environmental impacts.