Away from all the political storms making headlines, there is another kind of storm brewing across the globe in 2021, threatening big business polluters. Aviva, the British insurance company that manages 355 billion pounds in assets, announced it would divest stock and bond holdings in 30 of the biggest corporate emitters of carbon, if their boards failed to take affirmative action over climate change. This statement came close on the heels of an influential committee of MPs in the United Kingdom calling on the Bank of England to ratchet up environment standards in its pandemic stabilising, corporate bond programme. The committee has asked the apex bank to stop helping companies with high carbon emissions.
Swedbank AB, Sweden’s biggest mortgage bank, has taken a decision not to provide fresh loans to new oil and gas projects or to fund any company looking to drill oil and gas in the Arctic.
While these initiatives are forcing the hand of the world’s largest oil and gas and mining companies to change their way of doing business, pressure from investors is not limited to these industries alone. There is a wave of investors pushing large corporations from across sectors, to recognise their carbon footprint and take affirmative action. After all, there is no business which does not consume the earth’s finite natural resources and emits greenhouse gasses. Even a seemingly benign IT services sector has a considerable carbon footprint. Blackrock, which manages $7 trillion of global investor funds, has publicly stated it will start voting against boards of companies that do not take climate change seriously.
The beagle calls to end the “take-make-waste” model of making profits to reduce negative environmental impacts is only getting louder. This is not surprising if you consider the dominance of big business. According to published figures by Global Justice Now, in 2016, of the top 100 economic entities of the world, 69 were corporations, and only 31 are countries! And while the pandemic has pushed back countries on economic growth, many of the large corporations have grown in size and stature.
To be fair, several large and growing companies, especially in Europe, are realising their social and environmental impacts and making it a boardroom agenda even without investor guns on their heads.
Schneider Electric, the energy management and automation company, has embedded environmental, social and governance (ESG) considerations into every facet of its activities. It has stated long-term commitments, global targets and accompanying local targets, for sustainability. The company climbed from 29th to number 1 rank in the 2021 Global 100 ranking in the Corporate Knights index of the world’s most sustainable companies. While European, Canadian and US companies dominate this list, there are two companies from the developing world — Banco Da Brazil SA and Natura and Co Holding SA from Brazil, which find a spot in top 50. Only one company from India, Tech Mahindra, has made it to the world’s 100 most sustainable list.
This makes me believe Indian institutional lenders and investors are simply not demanding enough on sustainability. A majority of Indian companies are only meeting compliance norms set out by various state or city authorities. Rarely do they go beyond rule-based compliances and implement environment, social and governance or ESG goals with purpose and passion like their European counterparts. Unless there is a massive push from large institutional investors on Indian companies to reduce their carbon footprint, the needle will not move.
Perhaps, that’s why SEBI, the Indian stock market regulator, is putting the final touches on the Business Responsibility and Environment Reporting (BRSR) guidelines. The new ESG reporting norm will apply to the top 1,000 listed companies on Indian exchanges. Under BRSR reporting guidelines, companies will have to declare their R&D spends on improving environmental and social outcomes. They will have to disclose energy and water consumed to turnover ratios, and the percentage of recycled or reused input materials, among many other social and governance disclosures such as CSR, employee skilling and gender diversity.
It’s time for lending institutions and investors to align with SEBI and use their muscle to drive a deeper change. The same disclosures, once finalised by SEBI for the top 1,000, can easily be enforced by lenders for all businesses. Companies unwilling to clean up should be refused any fresh lending.
For the listed top 1,000 Indian companies, who end up rejigging their business for SEBI’s disclosure norms, the goal should be to raise the bar, manifold. They must aim to find a place in the new global equity benchmark index, launched by CITI, The Citi ESG World Indices, which makes ESG metrics the best business indicator to judge a companies’ investment worthiness. This benchmark index will bring together best-in-class environment performers across global markets, for investors to park their savings in.
Climate change is no longer an abstract notion. The increasing number and intensity of natural disasters have made it an existential crisis. Stepping up green standards to meet Paris Climate Agreement goals cannot be the government’s responsibility alone. Businesses must be part of the movement, or the target of containing global warming to less than 1.5 degrees of pre-industrial levels, will remain elusive.
Natarajan writes on real estate and sustainability trends