Big Firms Pass ESG Test...

SEVERE POLLUTION FROM stubble burning haunts many north Indian cities during winter. The biggest reason: India produces nearly 230 million tonnes of non-cattle feed biomass every year, a big chunk of which is burnt. Agriculture residue is seen as a major hurdle in India’s quest for net zero carbon emissions by 2070. India’s largest corporate Reliance Industries took up the challenge to use the biomass in the country’s first commercial-scale compressed biogas (CBG) plant set up at Barabanki in Uttar Pradesh in just 10 months right after two demo bio-energy units validated the technology at Jamnagar. At the 46th annual general meeting on August 23, Reliance Industries chairman Mukesh Ambani says: ‘’We will rapidly scale this up to 25 CBG plants across India. Our target is to establish 100 CBG plants in next five years, consuming 5.5 million tonnes of agro-residue and organic waste, mitigating nearly two million tonnes of carbon emissions and producing 2.5 million tonnes of organic manure annually.” This would save about 0.7 metric million tonnes per annum of liquefied natural gas. Ambani targets making Reliance a net zero company by 2035 and is spending ₹75,000 crore in new energy, climate technologies and materials.

Like Reliance, most leading private corporations in India — Tata, Adani, Birla, JSW, Godrej and big public sector enterprises such as ONGC, NTPC, IOC, BPCL and HPCL — have set in motion several projects to meet their environmental, social and governance (ESG) goals. But beyond the top tier of India Inc., Indian companies as a whole are yet to seriously include climate actions and ESG goals in their business plans, say experts. While an ‘ESG market’ is evolving, there are many issues — from awareness and data to regulatory framework and funding — that must be addressed to help companies integrate ESG norms into investment and business plans, they say.

Evolving Ecosystem

Increased investments in ESG and climate action are becoming a priority for India as the country is the world’s third-largest polluter accounting for 4.9% emissions. Six sectors which contribute 70% to India’s emissions are power, automotive, aviation, steel, cement and agriculture. By 2050, demand will increase manifold in power (eightfold), steel (eightfold), cement (triple), automotive (triple) and food (double) sectors, says McKinsey. Decarbonisation will require an estimated $7.2 trillion green investments until 2050, it says. The investment, $44 billion per annum at present, will have to increase 3.6 times by 2030 and 10 times by 2040, says McKinsey. India’s ambitious commitments at COP 26 in Glasgow include net zero emissions by 2070, cutting carbon emissions by one billion tonnes before 2030 and increasing renewable energy production to 50% of the total by 2030.

But ESG investing is still in an embryonic stage despite debates over policies and regulations and mandatory reporting of ESG practices. ‘’While some large-cap Indian companies have comprehensively integrated ESG in their businesses, the majority are at a nascent stage and still experimenting with the concept,’’ says Jhanavee Sheth, sector head, Energy, Materials, Utilities at ISS ESG, the sustainable investment arm of Institutional Shareholder Services Inc.

As of today, there are only 35 Indians in the list of 5,330 investors that are signatories to the Principles for Responsible Movement, the UN-supported group of investors for responsible investment in sustainable development. Data from Science-Based Target Initiative, which drives ambitious climate action in the private sector, reveals that share of Indian companies in setting science-based targets to reduce emissions is only about 4%.

However, the ESG framework is evolving, slowly but surely. The Securities And Exchange Board of India has made ESG disclosures mandatory for top 1,000 listed companies under its Business Responsibility and Sustainability Reporting (BRSR) initiative starting FY23. BRSR, designed to be in harmony with internationally accepted reporting frameworks, is perceived to be an effective way of disclosing non-financial data, says Jhanavee Sheth. Global non-profit IFRS, which works on financial reporting norms for a sustainable world, had established the International Sustainability Standards Board at COP 26, and published a draft of new standards in 2022. The final document came out on June 26, 2023.

Companies are also realising that they need to disclose their ESG profiles to attract capital from global investors and are willing to adopt ESG as part of their business strategy. ‘’Asset management companies are using ESG norms in investment decisions. There is a growing appetite for ESG-integrated assets among fund managers and prospective investors,’’ says Rishi Agarwal, managing director, India and Head, Asia of Foundation Strategy Group, a public policy think tank.

Deloitte’s CXO Sustainability Survey 2023 says 53% of Indian CXOs believe climate change is likely to impact their companies’ strategies and operations to a ‘high/very high’ degree over next three years. The survey report says 81% of Indian CXOs claim they have increased sustainability investments from last year, with 27% saying the investments have risen ‘significantly’. “Despite the geopolitical and economic uncertainties, India Inc. is prioritising climate change and increasing investments in sustainability,’’ says Viral Thakker, partner and leader, sustainability, Deloitte India.

The Upcoming Opportunity

ESG market analysis specialist Aspire Circle & Aspire Impact’s recent market-sizing study says the Indian Sustainability & Impact Measurement & Management (IMM) market is projected to reach $531 million in revenues by 2030 from $137 million in 2020. It says globally IMM has grown around four times from $2 billion in 2010 to $7.7 billion in 2020. It is expected to continue the trajectory with 15% compound annual growth rate (CAGR) to $31.2 billion by 2030. India will be a significant IMM market in Asia-Pacific along with Singapore. “This market-sizing study on the global IMM market is a first of its kind in the world,’’ claims Amit Bhatia, founder and CEO, Aspire Impact. The study identifies four growth segments by 2030 — databases, indices, ratings and rankings (CAGR of 30%), software and technology market (22%), consulting and services (11%) and executive education & training (11%).

Standard Chartered Bank’s Sustainable Banking Report 2022 identifies investors’ ESG priorities in growth markets. These are climate change and carbon emissions (40%), food and water scarcity (30%), pollution and waste management (28%), poverty and income equality (26%) and energy and resources (23%). Standard Chartered says it is an $8.2 trillion opportunity for retail investors. Along with China, India has the highest potential for growth in sustainable investing, it says, adding that about 40% Indian investors want to direct their money towards addressing climate issues.

Hurdles to cross

Despite massive aspirations and projections, India has a long way to go, say experts. Most companies still view ESG from a compliance lens. Top managements of Indian companies are generally not ready to integrate ESG into their core strategic vision. Profit with purpose is still a far-fetched call for most, says Jhanavee Sheth of ISS. ‘’Executive compensation aligned with ESG strategy is prevalent only at some large companies such as Vedanta and Tata,’’ she says.

Another issue is green power. Alternative energy is still more expensive than energy from fossil fuels. Hence, many companies find it difficult to reduce dependence on fossil energy. The shift to ESG practices often requires significant financial allocation and technological progress, which can be challenging for small and medium enterprises.

Inaccurate ESG reporting and data manipulation can also be an issue in the future. Companies’ data on ESG is neither standardised nor consistently available or verified. Methodologies and metrics also lack homogeneity. Despite mandatory reporting on the anvil, standardisation of measurement and reporting of data continue to be issues. “As sustainability investing begins to wield some influence in capital markets, impacting companies and others looking to raise capital, we might witness misleading portrayals of social responsibility,’’ says Rishi Agarwal of FSG. Companies could manipulate data to corner a larger share of the ESG-focused investment pie, he says.

Another problem is lack of shareholder knowledge. For example, there is still lack of clarity on how ESG risks translate into financial risks, which makes many mid-cap and small-cap Indian companies sceptical about integrating ESG into their practices. Moreover, they don’t know how to quantify and monitor ESG frameworks. “Conducting research and training staff costs time and money, something that companies, barring a few large ones, are not prepared for,’’ says Sheth.

Experts say it is high time India brings in standardised rules and norms for reporting ESG data and metrics, addressing the needs of multiple categories of stakeholders, including the regulator, rating agencies, index providers, asset managers and institutional investors. Another requirement is simplifying the complex web of benchmarks adopted by multiple rating agencies. A simplified approach must include a concise set of two or three headline metrics for every sector.

Another need is greater transparency and comprehensive disclosure requirements, covering a broad range of metrics like sustainability risk and adverse sustainability impact. “To tackle disparity in information availability on ESG performance, all financial market participants, fund managers and advisors must make comprehensive disclosures to investors,’’ says Rishi Agarwal of FSG. Experts say technologies like AI and blockchain should be leveraged to help companies in ESG interventions and practices.

With everybody realising that climate and ESG are going to be key factors in business actions going ahead, all Indian companies will have to soon raise their benchmarks in sustainable ESG practices for growth.