Ecological recovery combined with social reinvestment that results in decent financial return will be the model for recovery from the mess we find ourselves in. This meshes well with the theme of this year’s World Environment Day – Reimagine, Recreate, Restore.
The corporate world has been impacted by significant “environment events” beyond the ongoing pandemic. On one hand, it is battling to keep afloat, keep its employees safe, raise morale and find growth opportunities in a ravaged economy. On the other hand, it is reimagining what the future could be like if bugs and superbugs remain a way of life. Amid all this, Big Inc has been hit by few other surprises.
Big Oil got its clearest message yet that it must change. In a landmark judgment, a Dutch court ruled that Shell must reduce its emissions by 45% within the next 10 years. ExxonMobil shareholders voted to oust two major board members in favour of those who were advocating the transition to low carbon energy. At Chevron, most shareholders supported a resolution requiring the company to reduce its emissions. Soon, credit rating agency, Moody’s, warned that the credit risk of major oil producers had increased.
These events have two big implications. Firstly, Investors see Big Oil as a risky asset class unless it adopts and accelerates the Decarbonization of the industry and migrates towards Clean Energy. Secondly, mitigation of climate change effects on our lives and on the planet is now being seen as a Universal Right. And that companies, not just countries, are expected to respect the obligations of the Paris Agreement on Climate Change. Both the Law and Big Capital are beginning to understand that there are limits to procrastination. Time is rapidly running out on planet Earth.
A ruling in a case against a coal mining company in Australia upheld the principle that the Government has a Duty of Care to avoid causing harm to the country’s children when deciding on approving projects that are ecologically unsound. The petitioners were 8 teenagers and an 86-year-old nun. In another ruling involving an Indian mining company in Australia, the court admitted that the government may have erred in not applying a Water Trigger to its decision to allow 12 billion litres of community water for use in the mining activities. The Water Trigger is a piece of environmental legislation that is meant to be an “effective check and balance” in the use of precious public resources or commons.
An executive order in the US has made it mandatory for banks to disclose their climate change-related risks. IMF has already been working with the G20 economies on the standardization of the reporting of these risks. It has recently launched a “Climate Change Indicators Dashboard” which can help inform policy by highlighting data on greenhouse emissions, trade in environmental goods and services, physical and transition risks, etc. Fund managers who manage some $ 25 trillion worth of assets are becoming increasingly demanding on assessing the sustainability of those assets. They are getting worried that Climate Change risks are not getting factored in equity valuations and see the need to make these risks visible. Those assets or asset classes that don’t change to disclose and mitigate these risks may become “stranded assets” – orphaned companies that will not be fancied by most. Earlier the US had rejoined the Paris Climate Agreement, pledging to cut its carbon emissions by half by 2030, compared to its 2005 level. Biden is expected to gun for time lost on climate change initiatives in the Trump era. With an astute diplomat like John Kerry at help, the US is back in the game and is expected to engage with China, India and others on this issue.
What are the implications for India’s policymakers?
- Clear norms with international expectations must evolve around ESG compliance and reporting
- Regulators must compel Equity and Debt financiers to evolve in their reporting of financing of green and “dirty” asset classes
- The new laws around Environmental Impact Assessment (EIA) must be visibly seen to respect care for the environment and intergenerational equity in both letter and spirit. As an example, the Central Empowered Committee, appointed by the Supreme Court, advocated the cancellation of a double-tracking rail project in Mollem, Goa as it would have destroyed the fragile biodiversity of the Western Ghats. Such recommendations must stick if the EIA laws have to be taken seriously. Similarly, the type of development being attempted in Lakshadweep and Andaman Nicobar may destroy indigenous cultures, livelihoods, and fragile and pristine ecosystems. The policymakers should learn from the Mollem example and take swift corrective action before the issues come into the global limelight.
- GDP growth chasing policies that ignore the widening inequity and rampant damage to the environment must be re-examined and modern economic models like the Doughnut Economics model must be experimented with. This model, proposed by the economist Kate Raworth, advocates reaching a stage of equilibrium if minimum standards are achieved to lead a good life, with food and clean water, a certain quality of housing, sanitation, energy, education, healthcare, gender equality, income and political voice. While doing so, it should not cross boundaries relating to damage to climate, soils, rivers, oceans, the ozone layer, and biodiversity. This will mark a shift from an “extractive economy” to a “regenerative economy”
What are the implications for India Inc?
- ESG goals and goals around Decarbonization must be taken seriously. They must be based on contemporary science and must be made public along with the reporting on annual performance against them. A little over 20 Indian companies have set science-based targets consistent with the Paris Agreement of limiting an increase in temperature to 1.5-degree C. Over half of them are Mahindra group companies, clearly role models in this commitment to sustainability. Many more must follow quickly
- Companies must also take seriously the 17 UN Sustainability goals and build their growth strategies keeping them in mind.
- Investing in assets or projects where sustainability principles are being freely violated or EIA laws are being bent to suit profiteering and exploitation – is fraught with risk. The recent litigations in Australia bear testimony to this. The day is not far when companies will also be hauled for not fulfilling their Duty of Care towards the communities and ecosystems around them.
- CXOs must see their roles as Chief Value Officers, with the pursuit of sustainability the highest order goal. Companies must adopt the Doughnut Economics model into their long-term planning. For example, costing/pricing policies should reflect on how well they represent the full costs of sourcing, creating, and disposing of the things that are created and sold.
Also Read: What Is EIA 2020 & Why Are Environmental Activists Against It?
The emerging class of investors and shareholders want profits and a livable future for their children and the following generations. They want their IRR and want the double-digit cuts in carbon emissions and in material use. Ecological recovery combined with social reinvestment that results in decent financial return will be the model for recovery from the mess we find ourselves in. This meshes well with the theme of this year’s World Environment Day – Reimagine, Recreate, Restore.
Chandru Chawla is a senior leader in the pharmaceutical industry. The views expressed here are personal
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