The Business Of Sustainability

The November 2021 Conference of Parties (COP 26) for the UN Climate Change Conference made waves on many counts, among them tearful speeches, India’s refusal to accept the original text, pledging “phasing out” of coal and the commitments made to cut back carbon emissions to net zero. Prime Minister Narendra Modi made a commitment to bring down India’s carbon emissions to net zero by 2070 at the Glasgow meet.

The United States of America and the European Union aim to hit net zero in carbon emissions by 2050. China targets net zero carbon emissions by 2060. So what exactly are net zero emissions? It is just another expression for being carbon neutral, or for not adding to the amount of greenhouse gases in the atmosphere. On the ground, these commitments to combat climate change necessitate that corporate enterprises reorient their production processes to cut back on greenhouse gas emissions and adopt sustainable business practices.

Many big-wigs among India Inc. have already announced eliminating greenhouse gas emissions completely, among them Reliance Industries (RIL), ITC, the Adani Group, Wipro, Tata Consultancy Services and the government-owned Indian Railways. Reliance Industries will go carbon-free by 2035. It will contribute to 100 Giga Watts (GW) of India’s target of generating 450 GW of renewable energy by 2030. Ditto for diversified business conglomerate ITC, which has announced its plans to meet 100 per cent of its energy needs from renewable sources by 2030. 

The Indian Railways, one of the biggest spenders on energy, also plans to become the world’s first net-zero carbon emitting railway network by the year 2030. The phrase Environment, Sustainability, and Governance (ESG) is, consequently, the mantra that drives Indian companies. The Indian government now need to provide collaborative platforms to corporates to enable them to work with lawmakers, regulators, and academic thinktanks to propel the progress and maturity of sustainability initiatives.

The Grand Tussle: Sustainability vs Profit 

Adoption of ESG principles compel corporates to look at new operating models, change existing product lines, and even exit businesses that are perceived to be high in carbon emissions. The general perception is that adopting sustainable practices is a cost and effort-consuming exercise and an impediment to profitability. However, much of this dichotomy between sustainability and profitability reflects the shortcomings of the business enterprises themselves.

Quite a few corporates address sustainability and development agendas in isolation, rather than in conjunction with their businesses, which further fuels the debate about these two principles going hand in hand. Another issue faced by corporate conglomerates is the attempt to devise a ‘one size fits all’ net zero vision. Companies operate across complexities, given their presence in several geographies, operations along multiple business lines, and different supply chains. They are not able to accurately determine the business impact of ESG measures. Moreover, sustainability and development agendas are not customised or tweaked to specificity, which eventually lead to de-growth.

“The tussle will end when Sustainability is looked upon as a profit centre rather than as a cost centre and this is a challenge that the leadership needs to drive, implement and communicate to its employees, stakeholders, and customers. Sustainability is not a one-time thing, it will keep evolving, just like any other technology,” says Nitin Gupta, Head-Sustainability Advisory, Capgemini.

The fact of the matter is that sustainability is now going to be embedded in the DNA of every organisation. If corporates have to survive in the future, they need to look at sustainability as an aid to their growth and an aspect that gives them the necessary competitive edge in the market. It’s important to break down silos and involve stakeholders throughout the process, to gauge the business impact, and to ensure that business strategy takes these metrics into account in identifying opportunity and risk areas. For conglomerates, localised action plans that are more pragmatic, must be prepared.

Focusing on sustainability will have a cascading positive impact on companies. It will help businesses manage their risks and explore new opportunity areas. Improved brand equity results in better financial valuation by investors, attraction and retention of good talent, and enhanced customer loyalty. “Sustainability is providing businesses an opportunity to re-engineer their traditional business practices, bringing efficiencies and driving innovation,” says Gupta.

Capgemini’s research vindicates his claim. More than 80 per cent of organisations say that they have enhanced their brand reputation by improving their ESG ratings. Nearly eight in ten saw improved efficiency and productivity, and more than 50 per cent were able to reduce packaging costs and increase sales because of it. The ideal scenario now is to make businesses more sustainable with an improved triple bottom line, thereby creating value across all the three Ps, namely profits, people, and the planet.

Case Study: The Energy Sector

Companies are taking measures to ensure that their energy consumption has more green components. These measures include sourcing renewable electricity, reducing water consumption, installing equipment and technology to reduce solid, liquid wastes and minimise gaseous emissions. Organisations are also adopting new and innovative technologies that dispense with greenhouse gas emissions. 

They are taking steps to ensure responsible sourcing, such as reaching out to suppliers and educating them and influencing them to adopt sustainable business practices such as fair and equitable wages, no child or forced labour and reducing polluting ways of production, etc. “The lenders, financiers, leading banks and multilateral funding agencies like IFC, ADB, KfW, World Bank and others are preferring sustainable business to offer financial support and grants to companies across the world,” points out Rajendra Shrivastav, President AES India.

In the US, the RE100 Club includes some of the largest Fortune 500 listed companies that are firmly committed to the renewable energy business. These companies are abandoning their coal and gas-based electricity consumption and reducing CO2 emission in a time-bound manner. Over the next couple of decades, most of them will attain net zero CO2 emission from their entire business chain. Google and Amazon are front runners and have declared their intent to zero CO2 emission for conducting their business, followed by concrete steps to source only renewable energy for their business worldwide and that includes India as well.

Corporate giants in India such as the oil and telecom behemoth, Reliance Industries and the Adani group, which has interests in ports, coal mining, coal-fired plants, and renewable energy generation, are redefining themselves very rapidly. They have publicly committed themselves to locally building a complete industry for renewable energy by producing Polysilicon (required for manufacturing solar cells and modules), locally manufacturing battery energy storage, and industrial-scale hydrogen production in the country.

All these measures demonstrate a bold, ambitious, and amazing commitment to move away from traditional businesses to a new paradigm. This is happening with a sense of urgency owing to the compelling arguments for adopting sustainable businesses. “It is happening also with a sense of commitment to human continued existence, while at the same time, allowing them to be profitable for their stakeholders, governments through paying taxes and securing a better future for the society,” Shrivastav goes on to say.

The energy sector validates the overall business trends in vogue these days. There are three main tenets of sustainable business practices. Corporate entities need to be durable and ensure a significant reduction in the impact their businesses have on the environment.

Companies also need to have socially and ethically responsible business practices that are non-discriminatory and inclusive, and adhere to strong governance, free from malpractices, while being fully transparent.

But What are the Problems?

There is a common saying in the English language that ‘when something is too good to be true, it probably is.’ This age-old adage holds good for sustainability as well. While it looks like a bed of roses, investing in sustainable businesses is anything but that. Unless planned carefully and consciously from the outset, ESG fuelled investing and financial goal setting can distort decision-making in companies. This is important when shareholder value is at a premium and companies are looking to make maximum profits from the labour market.

In some cases, employees use the focus on ESG as an excuse for their poor performance. In a paper titled, ‘Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flow’, researchers from the University of Chicago say that sustainability is perceived as something that will positively predict the future performance of companies, but it is yet to be backed by evidence that suggest that high-sustainability funds outperform and outdo low-sustainability, or conventional funds.

Not just that, many investors who value small-cap and mid-cap investment stand to be disappointed, as most companies that fit the sustainability bill, fit the description of large-cap stocks, implying less choice and portfolio options for the conscious investor. This argument can also be extended to industries like tobacco and alcohol which can see investment dropping if the funds are diverted to more ESG friendly verticals.

While avoiding these industries seems to be a positive trend, it will only serve to enhance the risk of investors placing all their eggs in one basket; or rather, in one kind of basket. This means there will be a skewed supply of finance in industries such as renewables, electric vehicles, and the like, which again brings back the issue of lack of diversification. This will have a cascading impact on the economy.

What about Investors?

People and corporations looking to invest in ESG positive businesses need to educate themselves about climate change and its economics, as well as understand its implications on their

investments. Some climate-induced risks are creeping in slowly, while others are already staring us in the face. It is also interesting to note that carbon will emerge as an asset class in its own right, and analysts who advise investors must begin factoring in expected carbon prices into their financial analysis so they can be prepared for a world with more explicit carbon pricing, whatever form those prices take.

At the same time, investing in sustainable business practices that reap benefits, is a long-term process. One should also be wary of bigger companies with more resources who can easily invest in and report on ESG best practices, thus skewing the market in their favour. The ESG commitment could also sometimes emerge as marketing stunts or gimmicks. If investors fail to see through these factors they might lose out on profitable ventures while being blinded by the ESG promise.

The Way Forward

“In our lifetime we are coming across products, which are used, misused, and now being brought back under the label of corporate sustainability. Sustainability is not just professional, it has also become personal,” says C.P. Gurnani, CEO, Tech Mahindra. Gurnani’s statement is profound in the sense that sustainability is not a new concept for us. We have all become more conscious of our environment, not just on a professional, but on a personal level as well. We all pride ourselves on carpooling, say ‘no’ to plastic, purchase recycled products, etc.

On a global plane, the commitments made by nations at the COP 26 summit, including India, European countries and the United States, are driving businesses through evolving frameworks and incentives offered to them to align with sustainability practices. The window available for preventing the rise of average global temperature by two degrees is rapidly narrowing down and sustainable business practices can make a real difference to the future of mankind. 

Sustainable business practices have compelled industries, companies, businesses, organisations, and governments to rethink the way they have worked and rise to the challenge. “As soon as sustainability becomes personal, corporates will achieve their goals,” adds Gurnani. The individual commitment must be in line with the global commitment as well, he says.

The concept of ESG is here to stay and will certainly have an impact on business practices. The coming years will see businesses hire quant managers to map out their ESG graph and determine how to maximise profits and investments around it. We may also see a rise in sustainable products so that investors may expand their portfolios, which will further drive up market demand. Technology will manoeuvre itself not just to make ESG adoption easier, but also to help market players make an informed choice.

Having acknowledged the importance of ESG, it is also important to note that sustainability when seen from the business point of view is a nascent process. It will take some time before we can acknowledge the merits and demerits it has on businesses and investors alike. For the more environmentally conscious market player, it’s crucial to conduct market research before buying shares. Look for companies that are in line with your financial ambitions and ethical beliefs. The ESG principle is not a one-size-fits-all, it has to be tailored to specific entities, be it a conglomerate or an enterprise.