The emerging Environmental, Social, and Governance (ESG) mandate in corporate governance presents a new challenge for Indian companies. This rides upon the Indian Government鈥檚 focus on the need to adopt ethics, transparency, and accountability among businesses to promote responsible and sustainable business practices. The focus now is on how these sustainable growth practices will contribute toward value creation for the companies and their stakeholders. ESG-led discussions are finding more airtime in discussions on decisions around mergers, acquisitions, and divestitures, as well as new product launches and innovations. But how do these factors relate to corporate performance and structuring deals? While in the previous edition, we looked at shifts in governance and reporting, this edition explores the fast-changing financial and consumer preference landscape.听听

Financial Performance: How the lower cost of greener capital is driving ESG decisions听

One of the first questions asked in boardrooms is this: 鈥淭o what extent does good ESG translate into good financial performance?鈥� The easy answer is that there is an overwhelmingly positive relationship between ESG scores on the one hand and financial returns on the other, whether measured by equity returns or profitability, or valuation. But interestingly, there is a new element in the mix: the cost of capital. There is increasing evidence that a better ESG score translates to about a 10 percent lower cost of capital as the risks that affect your business, in terms of its license to operate, are reduced if you have a strong ESG proposition.

Source:

In a four-year study published in 2020, Morgan Stanley Capital International (MSCI) reported that companies with high ESG scores experienced lower capital costs than companies with poor ESG scores in both developed and emerging markets

Source:

Moreover, the cost of equity and debt followed the same relationship. All these studies continue to indicate that incorporating ESG into the management framework helps companies enhance the efficiency and value of the organization while lowering downside risk. While experts agree that investing in companies that do well on ESG standards is a comparatively new theme in the Indian market, it is only a matter of time before this becomes the norm.

Consumer Preferences: The Shift to Green听

We are seeing a definite green shift in the preferences of the Indian consumer after the global pandemic. Sustainability and health have become important factors when making purchase decisions. Of the Indian consumers surveyed in a recent global study, 78% were willing to change their purchasing behaviour to reduce a negative impact on the environment. (Source: ) Urban Indian consumers are most willing to do this. The percentage of respondents is the highest across all countries surveyed.听

Moreover, Indian consumers are at the leading edge of the shift compared to other countries studied, including the United States, India, United Kingdom, Canada, Germany, Mexico, Spain, Brazil, and China. Across various parameters related to lifestyle choices and shopping behaviour, those surveyed in India showed higher awareness and concern for sustainable alternatives. For example

This makes it amply clear that the Indian consumer, particularly from an urban background, is increasingly concerned about the global climate crisis. If you鈥檙e a company stepping up your response to sustainable practices, such as adopting greater use of renewables in your supply chain, reducing plastic waste, and investing in ESG outcomes, your consumer will notice. Nowhere is this better illustrated than the study of Indian consumers that reported that 48% of consumers share an emotional connection with products or organizations that demonstrate eco-friendly qualities.
The shift doesn鈥檛 affect the purchase behaviour alone.

Source:

In conclusion, the trends driving ESG in India foretell a future we will not have to fashion. We are on an inevitable march towards a greener tomorrow, led by markets and consumers. The successful organizations of the future will see that shift today before it comes as a surprise.听听

In the subsequent post, we will deep dive into industry–specific imperatives for ESG.听听

Follow Manish on

The post Towards a more Sustainable Future: The India Chapter (Part 2) appeared first on 麻豆原创 India News Center.

As the delegates concluded negotiations in November 2021 at Glasgow, it became clear that climate commitments would reshape the agenda for businesses around the world. India demonstrated the intent to move away from fossil fuels as much, and as early as possible pledging to:

Source:

With greenhouse gas emissions becoming central to any discussion on energy system choices, it is time to look at India’s role in the global context, given its unique challenges. As sustainability becomes critical to business success and not an afterthought, India is keen on keeping pace with the world in its race to net zero. That鈥檚 why there has never been a better time for Indian businesses to understand the acceleration of climate action across industries.听

India is now committed to the energy transition of decarbonization and achieving a state of net zero emission, making remarkable progress in recent years. It now has the 5th largest solar and 4th largest wind power capacity in the world, with its total capacity being over 100 GW. But there still is a long road to travel if it is to realize its commitments, and this is where private businesses come in. Responsible companies are throwing their weight behind net-zero commitments that are outpacing the formation of supply chains, market mechanisms, financing models, and other solutions and structures needed to smooth the world鈥檚 decarbonization pathway. For the Indian business, these conditions will create opportunities to innovate and to lead coordinated action by industry peers, value-chain partners, capital providers, and policymakers.听

By accelerating the strategic shift towards carbon-neutral operations, 麻豆原创 is standing by its commitment to the role of a frontrunner in climate protection.听

With sustainable development and the climate change movement gaining momentum in India, the sustainability reporting landscape is changing rapidly. The push from investors has further accelerated this movement, and it is now incumbent on companies to report their sustainability performance in order to maintain transparency with stakeholders. Sustainability reporting frameworks have evolved over time and companies worldwide have adopted these frameworks for measuring, monitoring, and disclosing performance in areas related to environmental, social, and governance (ESG). 听

The Evolving Indian Regulatory Framework听

While global ESG disclosures and frameworks such as the Global Reporting Initiative (GRI), Integrated Reporting (IR) and Sustainability Accounting Standards Board (SASB) are well known, India is gradually moving towards developing regulations around ESG. With the introduction of the Business Responsibility and Sustainability Reporting (BRSR) framework, SEBI has joined the group of countries and international organizations to have released comprehensive sustainability reporting frameworks. Though the reporting mandate is presently restricted to the top 1,000 listed companies by market capitalization, there is reason to believe that a wider range of companies would soon be covered under it. Advancements in the regulatory climate mean that mandatory disclosure听will be part of the evolving operating environment in India. All companies will need to have policies and practices to manage and report policies related to consumption and emissions, and more crucially the leadership and intent to see these changes through. Technology will play an increasing role in internalizing the way these changes will affect how businesses are run.听

Incentivizing Energy Intensive Sectors听

The economics of carbon offsets is going through rapid development, incentivizing energy-intensive companies to fundamentally change the way they do business. The Perform, Achieve, Trade (PAT) scheme by the National Mission for Enhanced Energy Efficiency is a regulatory instrument aimed at reducing specific energy consumption in energy-intensive industries. It operates on a market–based mechanism that enhances the cost-effectiveness of energy efficiency via certification of energy savings with ES-Certs. These can be traded on the power exchange. Meanwhile, international operations present their own regulatory norms that are driving the shifts in mindset towards a greener way of doing business. For example, the Carbon Border Adjustment Mechanism (CBAM) is Europe鈥檚 move towards sourcing more sustainable future products from countries that export to it. The move will introduce a carbon price on certain products imported into the EU, to align with the overarching goal to achieve climate neutrality in Europe by 2050. It is clear that global technology partners who have deep expertise in sustainable business practices will be better placed to partner with tomorrow鈥檚 successful companies.听

As India emerges from the shadows of the COVID-19 pandemic, we are seeing the economic landscape resonating with that of the world – on a wave of activism, financial innovation, and government policies aimed at positive societal change. A growing number of CEOs, policymakers, and consumers know that big social and environmental problems, particularly climate change, are accelerating beyond the boundaries of our current system.听

In the next editions, we look at evolving consumer preferences and access to greener capital markets. Stay tuned!听

Follow Manish on

The post Towards a More Sustainable Future: The India Chapter (Part 1) appeared first on 麻豆原创 India News Center.