Transition To Sustainable Economies
In the past year, regulatory pressures have pushed companies to gather deeper and a more expanded range of sustainability data. In March 2021 it became mandatory for all European Union investment firms and non-European firms marketing themselves in Europe to include Environment-Social-Government (ESG) factors in their investment decisions.
The Canadian Transition Taxonomy followed and so did the new climate change disclosure rules by the US Securities and Exchange Commission on March 21, 2022. Indeed, transitioning to sustainable economies where people and the ecosystem both thrive has emerged as national ambitions globally, including India.
On May 10, 2021, the Securities and Exchange Board of India also issued a circular implementing new sustainability-related reporting requirements for the top 1,000 listed companies by market capitalisation. In order to give time to companies to adapt to the new requirements, the new reporting requirements would be on voluntary basis for FY2021-22 and on a mandatory basis starting FY2022-23.These new disclosure needs to be made in the format of the Business Responsibility and Sustainability Report (BRSR), which is a major step-up in sustainability data requirements from SEBI’s earlier Business Responsibility Report.
Notably, the new BRSR disclosures include Scope 1 (direct GHG emissions) and Scope 2 GHG emissions (GHG emissions resulting from purchased power) as well as leadership indicators on Scope 3 GHG emissions (GHG emissions produced by the supply chain). The latter thus also indirectly puts pressure on small and medium sized companies in India which are often included in the supply chain of the 1,000 largest listed companies.
Follow the money
Much before the regulatory authorities, the investor community has been a staple enthusiast and catalyst for corporate sustainability data measurement. Large firms such as Goldman Sachs and Black Rock have been leading the pack.
In 2021, Goldman declared that it is deploying $750 billion across investing, financing and advisory activities by 2030 to help its clients accelerate climate transition and advance inclusive growth. BlackRock Inc. now manages $509 billion in sustainable investments, more than double from a year ago. BlackRock invests in companies that integrate sustainability into their business strategy. Indeed, it is imperative to invest in companies that are finding and implementing new technologies to bring down the green premium. The green premium from solar and wind needs to be reduced to make it more competitive than coal.
In India, while impact investors have been around for almost a decade, there is now a spurt of new ESG themed mutual funds and investment vehicles. In 2019, there were 3 ESG funds and in 2022 there are at least 14 well-established ESG funds, most of which invest in diversified equities. The vast majority of portfolios do not yet reflect a matured understanding of sustainability, with investment decisions still largely driven by company financials and a forced rationale for sustainability criteria. Some funds are net zero ‘at a portfolio level’ thus acquiring the license to channel money into highly polluting industries by simultaneously also investing in carbon negative ones. This does more damage than good. Indeed, we need to be investing in traditional companies, but the capital needs to be structured so as to direct it to help transition these companies out from their high environmental and social footprint.
However, these ESG funds have definitely accomplished mainstreaming of ESG. The common man investing in such a fund would know that companies are expected to be responsible towards the environment, society, and its good governance. In return, companies need to respond with data.
As ESG investing is becoming more mainstream, corporate sustainability data needs to keep pace with this change.
What data?
Driven by these regulations and investor pressure, and in some cases by ethics, the biggest movement in corporate sustainability in India in the last year has been the shift from anecdotal evidence to measurement of sustainability related company data.
Amongst India’s largest 200 companies in FY2020-21, 164 companies reported on waste. In the same reporting year, 63 companies calculated and disclosed their organisation’s Scope 1 and Scope 2 emissions data, whereas 36 companies reported Scope 3 emissions. Amongst India’s largest 200 companies, in FY2020-21, 69 companies published GRI-based sustainability reports and 43 companies published integrated annual reports. We see a trickle of companies conduct life cycle assessments (LCA) of their products and services in India, with the exception of companies such as Godrej Consumer Products that conducts LCAs of all products in their portfolio. LCAs leverage production and supply chain data to scientifically calculate the resource footprint from cradle to gate (or grave) of a product or service. LCAs are an essential assessment for any company, and the only method to counter greenwashing.
Indeed, there is much more to accomplish, but at least this is a start of a movement in the right direction.
Whether it is for internal sustainability performance assessment or public disclosures, the most pressing challenge for companies is usually to identify the relevant sustainability data within their company. Often it is unclear who the data owner is. Or at times, the data has never been gathered before thereby making it difficult to locate. There are a number of different reporting techniques, each with specific data requirements and measurement units, which compounds the challenge of even knowing what data needs to be collected. The complexities around data gathering for measuring corporate sustainability can dampen the enthusiasm of a company to make progress on its sustainability performance.
For companies measuring their sustainability for the first time, they must adopt a phased approach to measuring corporate sustainability. It is vital to first start with a single assessment technique, only choosing from established frameworks such as the Global Reporting Initiative, Integrated Reporting, TCFD, Social Return on Investment, Life Cycle Assessment, as per what best suits their measurement needs, sector, and strategy. There is a welcome shift in corporate India towards the adoption of established sustainability measurement frameworks, away from picking up ad-hoc data.
The organisation needs to then bifurcate the specific data needed per ‘data owner’; send the data owner the data items relevant to him/her; train an in-house resource to be the central hub to thereafter collect the data and do the analysis as per the methodology. In the case of LCAs that need sophisticated and expensive software for data modeling, turn towards university partnerships.
India Inc.’s leadership
India’s CSR expenditure for FY20 stood at Rs 17,885 crore, already down from Rs 18,655 crore the previous year. Then further, as what might have been a direct economic consequence of the pandemic, 19.65 per cent of Indian companies who were profitable in Q4 of FY20 reported losses in Q1 of FY21. Therefore, while the mandatory CSR spend plunged, corporate India nonetheless played a pivotal role in fighting the pandemic through innovations such as indigenously produced vaccines, new models of affordable healthcare, and digitisation.
These companies in pockets of India Inc. displayed that regulatory and market pressures are not necessarily the only inciters for corporate responsibility.
Similarly, gathering sustainability data across the value chain and making meaningful changes to processes and products accordingly must also be seen as a basic corporate responsibility. Companies do not need to wait for policymakers and investors to shove them on to this route. Instead, the best reason for companies to change must be their desire to be a part of a just transition towards becoming levers of social and environmental progress. Making this transition is not a risk. It is a unique opportunity.
But first, we cannot know what to transition out of unless we measure.
.JPG)
