BT500: The ESG Imperative for India's Largest Firms

Time is money” is a common business refrain. Well then, humans have about 7 years and 9 months until the effects of global warming become irreversible, according to the global Climate Clock.

But Infosys did not need such a warning. Nor did it wait for India to pledge to the COP26 climate summit in 2021. It voluntarily committed to carbon neutrality in 2011. In 2020, when the Climate Clock’s countdown began, the IT services firm turned net carbon neutral. Its footprint dropped from 179,410 tonnes of carbon dioxide equivalent (tCO2e) in 2008 to 139,407 tCO2e in 2020 (pre-Covid-19) and to 77,350 tCO2e in 2021. It did this by reducing emissions under its control by over 70 per cent, reducing per capita electricity demand by more than 55 per cent and increasing its share of renewable energy by 47 per cent between 2008 and 2020.

It’s not just Infosys, which is ranked 4th in the 2021 BT500 list. As many as 62 Indian companies have committed to reducing emissions so far, according to the Science Based Targets initiative (SBTi), a global alliance that helps firms set climate goals. Last year, 24 companies voluntarily pledged net-zero goals. Some of the top companies that have pledged include BT500 top 10 listers like HDFC, which aims to be carbon neutral by 2031-32; and Reliance Industries, which has a 2035 target. Tata Consultancy Services (TCS) and State Bank of India (SBI) have a 2030 deadline. Government-run Indian Railways also has a 2030 deadline. Then, there is the India Climate Collaborative, a platform launched in 2020 as a collective response from Indian philanthropies to accelerate climate actions. These actions are necessary because as much as they contribute to India’s economy, corporations are also responsible for a hefty chunk of its emissions.

“Industry forms about 22 per cent of India’s emissions and this number is actually projected to rise as the manufacturing sector expands in the next couple of years,” says Shloka Nath, acting CEO, India Climate Collaborative. She says that infrastructure investment is predicted to rise 50 per cent by 2025, while India’s steel production capacity is expected to double by 2030 and cement production to rise by 50 per cent. “With these statistics, we can figure how industry’s role is only going to get larger in terms of emissions,” she adds.

“Indian companies stand to lose Rs 7.14 lakh crore to the impact of climate change if they do not take mitigation measures over the next five years, according to the Carbon Disclosure Project’s (CDP) 2020 annual report,” says Atul Bagai, Head, UN Environment Programme, Country Office, India. If they do it right, the firms also stand to gain Rs 2.9 lakh crore from the opportunities that will emerge, he adds.

Even in hard-to-abate sectors such as iron and steel, Indian firms have been increasingly working towards decarbonising their operations and have been recognised as global leaders in the sustainability space. Various Indian companies have entered the Dow Jones Sustainability Index.

Broadly, greenhouse gas emissions are categorised into three groups, or ‘Scopes’. Scope 1 covers direct emissions from a company’s owned or controlled sources such as fleet vehicles and air-conditioning. Scope 2 covers indirect emissions from the electricity purchased and used by the organisation. Scope 3 includes all indirect emissions in a company’s value chain such as those associated with business travel. Reducing these does make an impact. For instance, Apple’s sustainability actions for over 18 million metric tonnes of CO2e annually is the equivalent of taking over 4 million cars off the road each year.

Infosys’s efforts to become carbon-neutral included investing in 60 megawatts (MW) of solar capacity and carbon offset projects such as providing sustainable solutions to replace traditional firewood cooking in villages. “We designed our carbon neutral programme around three pillars: energy efficiency to reduce emissions, use of renewables to avoid emissions, and carbon offsetting to address emissions that cannot be removed,” says Bose Varghese, Head-Green Initiatives, Infosys. But the company, by its own admission, is not yet done.

India Inc. too has just about set targets. Now it has to go about achieving them. And not just in-house.

Like in india, companies globally have pledged to lower their emissions. But rather than focussing on their own carbon output, more than two-thirds of multinationals plan to first tackle their supply chains’ emissions, a Standard Chartered study of 400 MNCs in June showed. That means, for instance, an Indian auto parts maker will have to furnish its sustainability report if it wants to continue supplying to automakers in Europe, North America and Japan. In fact, Indian companies risk losing $274 billion in exports every year if they fail to curb carbon emissions by 2025, the report said.

If that’s not reason enough to step up their sustainability game, there’s more. This time from the other side of the money chain.

Capital markets are starting to reward companies making systematic investments in climate change and sustainability efforts by pushing their stock prices higher. “Institutional investors place a high value on environmental, social and governance (ESG) factors. But if a company’s activity or product harms the environment, the company is marked negatively,” says Sankar Chakraborti, Chairman, ESGRisk.ai, a part of credit rating agency Acuité.

He explains using the example of ITC Limited. “ITC’s tobacco business has been hit hard by ESG concerns in recent years, resulting in a drop in price-to-earnings multiples. The tobacco business has a negative impact on customers, which results in investors forsaking the company stock,” says Chakraborti. Still, ITC has been carbon positive for 16 years, water positive for 19 years and solid waste recycling positive for 14 years, besides running an afforestation programme that also generates employment. Its “AA” rating by MSCI-ESG is the highest amongst global tobacco companies, and ITC has also been included in the Dow Jones Sustainability Emerging Markets Index. An ITC spokesperson told Business Today on email, “The company’s sustainability performance is acknowledged worldwide, including in areas like climate change, water stewardship, sustainable agriculture and livelihood creation.”

And it’s not just manufacturers, but even services companies that are being gauged by the investor community on their sustainability efforts. “Investors are increasingly using non-financial disclosures to make investment decisions, which in turn is the reason many companies, such as ours, have moved towards integrated financial reports,” explains Preeti Gandhi, Head of Sustainability Marketing at TCS. The company halved its carbon footprint in 2020 and is aiming to reduce its Scope 1 and Scope 2 emissions by 70 per cent by 2025 over a 2016 baseline.

Many investors are interested in understanding TCS’s sustainability-based engagements with its customers as well, since they realise that is where the company can have the most impact, says Gandhi. “We are seeing a lot of our stakeholder groups, including our clients, partners, employees, etc., choosing us because of our strategic focus on sustainability and ability to help them meet their targets, and we remain excited to know that not just the investors, all stakeholder groups genuinely care.”

One stakeholder that joined the ranks in 2012 is India’s stock market regulator Securities and Exchange Board of India (SEBI), which made it mandatory for the top 100 listed companies (by market capitalisation) to furnish a ‘business responsibility report’ (BRR) each year. This May, SEBI replaced that requirement with the need for the top 1,000 listed companies to file an annual ‘business responsibility and sustainability report’ (BRSR). This means the big companies will soon have to disclose their material ESG risks and opportunities, approaches to mitigate or adapt to these risks and their financial implications.

That also means targeting the low-hanging fruit may no longer be enough for corporate India.

So far, a majority of Indian corporations have been opting for the easy and the obvious to lower their carbon footprint. The easiest of these is perhaps recycling water and other materials. The most common operational change is replacing fossil fuel-based power generation with renewable energy. And this is not just because of decarbonisation, but because renewables are emerging as the cheapest form of energy and offer a high return on investment.

However, with growing scrutiny on their role in climate action, companies can no longer just cut emissions in its own operations. They also need to scrutinise their value chains and create tools, models, solutions, and support innovations to scale up climate action.

Besides renewables, another key area attracting investments is energy and resource efficiency, which is using IoT solutions to track energy losses and using analytics and fault diagnostics for energy optimisation. There is, however, markedly less interest in using green hydrogen (a fuel produced using renewable energy) or ‘carbon capture, use, and storage’ (CCUS), which involves capturing emissions from industrial processes and fossil power generation for reuse or underground storage.

Still, a positive is that Indian companies are increasingly putting an internal price on carbon—a theoretical cost attributed to emissions to encourage the adoption of less carbon-intensive approaches—to meet their climate targets, according to the CDP India Annual Report 2020. This could lead to higher investments in SBTi.

“SBTi goals are in line with the Paris Accord, laying down a mature framework that not only targets a long-term strategic sustainability objective but also encourages building a tactical plan by Indian companies to meet their milestones,” explains Amit Chadha, CEO and Managing Director, L&T Technology Services (LTTS). “Adhering to the guidelines will require transformational changes across all segments, especially energy and transport systems, industrial technologies and processes.” LTTS itself has invested in two battery charging technology labs and launched energy management tools. It is also developing a lab that mimics a sustainable city. It aims to achieve carbon neutrality by 2040 and water neutrality by 2035.

However, just using renewable energy and SBTi targets isn’t enough. Companies also need to focus on being sustainable at every stage of the product lifecycle—from conceptualisation to design and then from manufacturing to sourcing.

Hindustan Unilever’s (HUL) sustainability efforts tick the usual boxes. Its manufacturing operations use 54 per cent less water now than in 2008; its factories, offices, warehouses and other facilities are powered by 100 per cent renewable grid electricity; and it facilitated the safe disposal of more than 150,000 tonnes of post-consumer-use plastic waste. But it is also working with external partners to eliminate deforestation from its supply chain.

“Over the years, we have made significant progress in sustainable sourcing. In 2020, 93 per cent of tomatoes used in Kissan ketchup continued to be sourced sustainably and over 67 per cent of tea procured for Unilever brands was sourced from sustainable sources,” says Willem Uijen, Head of Supply Chain, Unilever-South Asia, ANZ, Indonesia, Philippines, SEAT and Vietnam.

Large companies can also play a significant role in bridging the financing gap as far as curbing carbon emissions are concerned, says Manpreet Singh, Partner, ESG, KPMG in India. “India’s Nationally Determined Contributions estimates a requirement of $2.5 trillion between 2015 and 2030 (about $170 billion annually), while current investment flows in the country stand at approximately $19 billion,” he says. The private sector can also support the government by aligning their CSR (corporate social responsibility) spend with initiatives such as afforestation and reforestation activities, where investments are low compared to social and developmental activities.

India’s top corporations are leading the way in limiting their carbon footprint, and that is commendable. But the legwork of actually achieving those targets is only just starting. Plus, until and unless such sustainability efforts are adopted by a wider Indian corporate diaspora, it is unlikely to make a dent in the country’s emission footprint.

Time is money. And the Climate Clock is counting down.

@nidhisingal

Disclaimer: Infosys spokesperson name has been corrected to Bose Varghese on the company’s request.