India s Sustainable Inclusive Economy of Scale -Srinath Sridharan

As a global consumption-power, and a populous democracy, India is a fulcrum of a global inclusive development ideology. In this aspect, India’s commitment at COP26 for Net Zero 2070 is a well-structured plan. India has to catch up with the rest of the developed countries in infrastructure, as well as in creating a stable social security net for its population. Over the past few years, the Indian polity has displayed the urgency to lay the foundations for a stronger,   resilient nation that can lead itself and the global dialogue towards inclusive development. No development can be inclusive, without acknowledging the primacy of nature, and our commitment and efforts are to reduce damages to natural resources, as well as our behaviour and value systems.  

Despite being the third largest carbon emitter in the world, India’s emissions are low in per capita terms. India is committed to increasing its renewable non-fossil fuel energy capacity to 500 GW by 2030, meet 50 per cent of its energy demand from renewable energy sources and reduce the economy’s carbon emissions intensity by 45 per cent. It will also seek to reduce its total projected carbon emissions by a billion tonnes by 2030. In its COP26 commitments, India has clarified its stand that those responsible for historical emissions have to take ownership of reducing them. India’s stand is appropriate in not letting developed nations get away with the   large financing that’s needed to clean up the growth-debris they have left.  

For many developed nations with a fraction of India’s population, who express their dismay or any negative rhetoric, here is a thought: All these decades, developed nations have used fossil-fuels for their industrial development and consequent socio-economic progress. Once they developed the economic-strength to move to a sustainable way of living and other good-ways of growing their society, it is easy to “preach” the “good ways” to those who are developing their economies, especially when they have to lift a large section of the population for whom the only thing free in their lives is the air – and not necessarily clean-air at that!  

By 2070, the population of the world is expected to be around 10.4 billion people, with India housing around 1.6-1.7 billion individuals. India will be an essential element of the world’s sustainable future.

*ESG – an Evolution 
The term ESG (environmental, social and governance) was first coined in 2005 in a landmark study initiated by the United Nations, titled ‘Who Cares Wins’. Environmental, Social, and Governance refers to the three core themes in measuring sustainability and societal impact of an investment in a company. These criteria also help in determining the future financial performance of companies. Environmental, social and governance issues concern and impact every company, irrespective of where the company operates. Environmental issues range across climate change, carbon emission concerns, waste management, pollution (air and water). Social issues range across labour issues, modern slavery, under-the-table sourcing practices, product liabilities, privacy concerns, data security.  

Governance issues range across business ethics, corporate culture that shape how a company functions and its organisational practices, board impact, enterprise risk framework and granularity of the organisation disclosures. Sustainability is not a buzzword or a jargon. It is a care-provider and core-driver in our daily lives. The negative impact of climate change is more evident with changes across social, environmental and financial landscape and it is affecting all of us. In the business world, sustainability is no longer a “nice to have” but a “must do”. As inhabitants on this earth, we are staring at a grim scenario.  

As a topic, ESG in India is seen with mixed signals of cynicism, hopes, and even disdain. Largely the current adoption rates of ESG, both at the industry level, as well as the regulatory level, is low, and public-narrative oriented. Of course just like the green-washing concept around ‘window dressing’, sustainability efforts, ESG-washing also happen currently. The ESG norms will play a vital role in the very-existence, growth and sustainability of purpose-driven companies. However in the public narrative, the ‘S’ in ESG is less measured and it is ‘E’ of ESG that gets much attention. The ‘G’ gets attention when something goes wrong or is missing!

Environmental, social and governance is no more just that or about “investing plus sustainability”. It is now the way of responsible investing. The “ESG”ness of a firm would neither happen overnight nor can it be bought by simply copying S.O.Ps from any Playbook. The ESG norms and thinking about them have to be ingrained in the organisational culture. As with any quality parameter, ESG will be a continuous improvement journey, and the standards have to keep evolving.

*Money for the Goals 

The total investments that India would need to achieve its Net Zero goal by 2070 is $15 trillion over the next 40 years. This investment would help catalyse green-transforming India’s fossil-industries, to push industry change from legacy processes and plants to sustainable ones, to building green infrastructure, and to bringing in large scale carbon neutral technologies. The (repeatedly broken) promises made by developed nations to finance climate change initiatives of other countries is staring us in the face. Even assuming that they will make good on these   promises on time, the behavioural aspect of industries globally in sticking to green commitments, is a tough task for the regulators.  

Supporting any nation’s green transformation will need a regulatory blueprint, which has to be firm and supportive. The way India finances its journey to Net Zero 2070 could well be a framework for other nations to emulate. For it would need to have contours of social inclusion, economic flexibility, sustainable financing, while keeping in mind, the political compulsions, as well as serving the demographic requirements of creating livelihood.

However the banks in India have been very slow in their efforts towards green financing in general. Their approach to traditional lending and to move towards assessing sustainable businesses needs pace and quick wins. They have to understand that green financing is not an affirmative action anymore, and is a business opportunity.

A critical piece needed for NetZero will be a functional green finance sector that should mobilise the required capital and debt requirements. A study by Climate Policy Initiative (CPI) said that India could mobilise only $18 billion in climate investments in 2018 compared to the annual requirement of $160 billion.  

According to an RBI Bulletin in January 2021, “In sum, green finance in India is still at the nascent stage. Green bonds constituted only 0.7 per cent of all the bonds issued in India since 2018, and bank lending to the non-conventional energy constituted about 7.9 per cent of outstanding bank credit to the power sector, as on March 2020.” The report also mentioned that the development of green financing, funding of environment-friendly sustainable developments are not without challenges, which may include false compliance claims,  misuse of Green Loans and most importantly, maturity mismatches between long-term green investment and relatively short-term interests of investors. This fiscal, India is expected to issue its maiden sovereign green bonds worth at least $3.3 billion to fund the shift to a carbon-neutral economy.

According to a recent report by think-tank Climate Risk Horizons, banks in India are not prepared to adapt to climate change; and critically have not yet factored in any climate-related financial risks into their day-to-day decision-making and business assessments. Some of the criteria used to assess the banks include commitment to phase out investments in coal, disclosing and verifying direct and indirect emissions, issuing green loans and financing climate mitigation, and net-zero targets for different types of emissions and their implementation plans. The report is also critical about the fact that none of the 34 banks have tested the resilience of their portfolios in the face of climate change. Sadly only two banks have even committed to stop funding new fossil fuel-based power plants.

Globally, financiers have started taking tough decisions, including cancelling loan sanctions and   disbursements, when the companies they finance do not meet sustainability standards. Will Indian lenders have the courage, and the regulatory ability to take such a strong stand with their larger corporate clients? It would be useful for the Union Ministry of Finance to publish an annual update on the progress of the Indian financial services sectoral efforts in the journey towards Net-Zero.

With the current status of green lending, it is worrisome and rightful expectation that the banking regulator – the  RBI – would bring in stringent rules of engagement around Climate Financing, and phase out fossil fuel financing over the next many years. The national goal of Net Zero 2070 has to be shared by the financing sector and the industries for its success. Despite these initial slowness, firmness of policy framework and tightening of the brown-to-green-transitioning could be addressed by the regulator.  

Also the policy push to encourage fiscal incentives for investments in low-carbon sectors, sustainable living solutions and overall social-good economic activities could become a catalyst. Early in 2021, the RBI joined the ‘Network for Greening of the Financial Systems’, a group of central banks working in developing financing to help the transition to renewable energy projects and sustainable businesses.  

*Financing Needs Useable Data  
In the effort to green finance India and track green financing initiatives is a serious issue, namely “Data governance”. It ranges across the (lack of) availability of data, veracity of data format, source of data collation, quality of data, and consistency of data over a time-frame.  

*Green-data: The lack of a harmonised green finance taxonomy in the country, and non-standardised reporting of data makes green tagging of domestic entries arbitrary, and randomness of data management left to the user’s discretion. For example, even budgetary provisions and policy documents of governmental entities use different terminologies or codification to mean the same item heads!

*Indian green-database: The absence of a centralised dataset on green lending by the Indian financing system was particularly challenging to account for private debt. The Indian banking system should push for better quality and deeper data sets around Indian industries and their efforts towards green-businesses. After all, without the right data, both credit decisions as well as viability would be suspect. And we might fall prey to green-washing the actuals.  

*Data sanctity:  The various states and central governmental departments manage their budgetary data with different data formats and granularity of these budgets are not common and hence create the need for ‘assumptions’ to be made in any green financing project effort. Any of these assumptions can make or mar the actual trackability of actual projects. When it comes to ‘social metrics’, data again is not standardised. Even for seasoned impact investors, available data offers little to help assess the social performance of the companies in which they invest.

*Tracking disbursements:  The existing Public Finance Management System, in its current form, does not provide consistent and granular information about the flow of finances and end-use. An effective mechanism of measurement, reporting and verification is essential for such a large investment expectation. The central and state governments use their public enterprises for the deployment of green-funds; many of them also function as a source of green finance themselves, and use varying systems and data reporting formats. Hence it is crucial to ensure that their contribution is measured in detail to avoid any double-counting in the national green-investing or green-funding initiatives.  

*Public tracking of private green-funding:* Despite an increase in sustainability reporting in India, the relevant information on private investments is sketchy. Many organisations struggle to accurately measure the impact of sustainability, because relevant data is not being collected or is of poor quality. There is a disparity between the large and other companies, with the former being able to invest in various tracking methods and processes. Also  

many private companies’ green-investments are accounted for as their usual business expenses in their accounting methods.

*Missing Public database:* For a nation looking to bring in $15 trillion in investments, data governance becomes a basic-task!  Hence a public database that would be low-cost to use, is needed in tracking both public and private green-investments. Since XBRL is the data format that banks use for data-reporting, it might be useful to continue with this standard. A well-designed green finance taxonomy can avoid data mixup, reduce transaction costs and encourage the development of green-sectors.  

*Sustainability-based National Budgeting 
That India announced its pioneering intent in its Net Zero outlook is evident from the way the nation has adopted renewable sources of energy. The focus to adopt sustainability as a way of life has been further embraced in the Union Budget for FY 2022-23. Many businesses in India contribute to emissions and going net-zero requires them to substantially alter their strategies to assess and reduce carbon footprints over time.

*Chemical-free natural farming* will be encouraged to safeguard against soil degradation. States will be nudged to revise the syllabi of agricultural universities to meet the needs of natural, zero-budget and organic farming, modern-day agriculture, value addition and management. Natural farming in India is being promoted through a dedicated scheme, Bharatiya Prakritik Krishi Paddhati e (BPKP). The scheme promotes on-farm biomass recycling with a major stress on biomass mulching, use of on-farm cow dung-urine formulations, periodic soil aeration and exclusion of synthetic chemical inputs.  

The use of ‘Kisan Drones’ need to be promoted for crop assessment, digitising land records, spraying insecticides and nutrients. The government has already issued standard operating procedures (SOPs) for use of drones in the farm sector.

Instead of massive capex in setting up EV (electric vehicle) charging stations and the associated technology-lag to fast-charge those batteries, Battery swapping is an efficient way to charge an electric vehicle (EV). Such an ecosystem needs a policy framework that would necessitate inter-operability standards (that imply the standardisation of batteries used by OEMs and manufacturers of EVs). Current market worries about EVs catching fire is a mirror for automobile sector regulators to work on, along with the scientific community, to homologise commercial technologies for Indian conditions.

This year budget announcements towards sustainability has been a good start, and many such positive policy pushes are expected over the next few years. For example, India has already made positive strides in climate action in quadrupling wind and solar capacity in the last decade, as well as in launching the National Hydrogen Mission.  

*India & Global Alliances  
As a populous nation, India cannot shift to clean energy sources overnight. It has to balance its energy needs, while shaping the future narrative of renewables. The green transition would not only need financing, but also technology adoption and sharing of learnings available with global participants. In this journey, India has started its outreach of international-cooperation and collaborating on climate change issues, achieving sustainable energy and food security, with addressable economic growth.  

It’s recent ‘Clean Energy Partnership’ (CEP) with Japan is one such large initiative. This would address shared learnings and technology initiatives across areas such as electric vehicles (EV), storage systems including batteries, electric vehicle charging infrastructure (EVCI), solar energy, clean including green hydrogen/ammonia, wind energy, exchange of views on respective energy transition plans, energy efficiency, CCUS (Carbon dioxide Capturing, Utilisation and Storage) and Carbon Recycling.

Similarly the UK has a collaboration in the form of ‘India Green Guarantee’ to the World Bank that offers an additional $1 billion for green projects in India. India and the UK are also part of global initiatives like the COP26 Energy Transition Council and Zero Emission Vehicles Transition Council. These strive to double the rate of investment in clean power and in the pace of the global transition to zero-emission vehicles by 2030.

*Local & Vocal  
With rapid globalisation, the supply chains have become far more complex. However, the Covid pandemic has also created havoc on the global supply chains. It has put pressure for profit-maximisation. Redeveloping sourcing capabilities around the globe with managing disruption risks has become an accepted business practice, or rather an expectation from the stakeholders. Outsourcing production to another country for cost arbitrage did deliver better economic outcomes. It has also brought in economic and social development, resulting in higher standards of living for millions of people. But at what severe cost to sustainability efforts?

Any meaningful effort to achieve environmentally-sustainable economic development will have to start with impact from the local level. The local population has to be involved in the entire concept-to-outcomes. Yet there is no one single global Playbook possible in achieving this. We have to factor in cultural sensitivities, political pulls, economic constraints, as that we rightfully respect the interdependence of nations, societies and global economies. Individual countries, in conjunction with their industrial stakeholders, will need to develop approaches to solving sustainability problems that are tailored to their own rate of economic development, cultures, religions, and political systems.  

Yet planned actions in a few sectors can yield disproportionately large favourable outcomes. India has already kick-started its policy initiatives towards consistent transformation in the five sectors that can catalyse the move towards greener India. The objective is to ensure that these high impact sectors, namely AEIHM sectors: Agriculture, Energy, Infrastructure, Heavy industries, Mobility – would offer the highest visible change in reducing the carbon footprint. After all, these are the sectors that actually shape where we work, what we eat and how people, goods and services are transported.  

Although each sector has a different developmental dynamics and challenges, a wholesome approach to climate action is needed. To this effect, the Indian policy focus on bringing inputs from the end-users, multilateral agencies, local governments, civil society, industries and researchers is commendable.

*Startups & NetZero 
India enjoys a vibrant startup ecosystem, that’s inclusive with merit being the basis. It has attracted bright minds across the length and breadth of the country, including the much spoken about India and Bharat cohorts. The sector has also attracted private investments to encourage its scale of delivery. This along with social impact ideas, have given rise to green-ventures, RegTech, GovTech concepts. It is estimated that over a sixth of startups under incubation currently are focussed on these aspects.  

Many startups are focused on clean energy. The continued emphasis of India’s renewable energy aspirations is helping this cause. India has had one of the fastest growth rates in renewables. In the journey towards measuring carbon footprint, many startups have been developing and offering carbon audit processes using technology. These have commercial outcomes as businesses can use authenticated footprint data for carbon credits.

*Society and Social Metrics 

The basis of social impact is just not about risk, and is about good social behaviour and social outcomes. Usually one discusses the negative social impact of for-profit entities like labour relations, human rights issues, polluting water sources in a community, promoting wrong food behaviour, etc. These in turn, negatively impair the social-licence for those entities to operate.

Conversely, there are also social impacts that can positively affect a company’s financial performance through competitive advantage, business growth, market relevance, brand purpose, and strengthening the social-license to operate. Social factors are primarily those that will arise in the relations between a company and people or institutions outside of it.  

Much of positive social impact are not measured in many ESG tracking systems. Also the regulatory task on this has been slow globally. Regulatory disclosures around ‘social’ are generally vague and intent-led and not impact-measured.  

Companies have their independent fiduciary duty to measure and disclose material ‘Social impact’ information to their shareholders. Hopefully in the next many months, the regulators would bring in specified ‘standards’ for social impact reporting. Standards should ideally define thresholds for what will constitute a “unit” of impact for outcomes such as employment, skills, women empowerment, gender topics, poverty alleviation. Since this is a complex data-set, it would need customised taxonomy, that would have data transparency and verification trails.

*Businesses & Crossing the Ten T’s of ESG 

The ESG is a journey and would need a process orientation in bettering the standards constantly. There surely is no shortcut for achieving any ESG metric. The industries should start off with building the culture of ESG in true spirit, and not just economic-motive. Rightful ESG adoption would anyways benefit in positive economic outcomes, and with added social benefits. Yet in any policy development, as well as sectoral initiatives, we could include these:

*Theme : Environmental, social and governance issues concern and impact each of us, our lives, and every company, irrespective of where the company operates.  

*Target : Just as India has its Net Zero 2070 goal, every business entity operating in India will need its own target along those lines. If it’s too stretched a target, the green transition will become unviable or scary. The entities have to micro-detail their plans and allocate resources for Brown assets to green transition. In short, they need a plan like ‘I.N.D.I.A’ : Integrated-to-enterprise-survival, Net-Zero-focussed, Digital-enabled, Innovation-preparedness, Audacious-goal.  

*Track:  every step in the business value chain; today most organisations despite efforts may not be able to track processes and concerns, beyond their second level of supply chain. Also the ESG metrics need to be tracked at the highest supervision levels of the organisation (the board as well as the sectoral regulator).

*Trace: the ability to trace back to source will become essential for most industries; especially consumption ones like food, grocery, pharma, bio etc. True concern for environment and governance aspects have to have the ability to go-to-source.

*Transparency: The Indian capital markets regulator’s task on ESG, of the top 1000 listed entities (by market cap) is in the form of Business Responsibility and Sustainability Reporting (BRSR). This will be the single integrated format of sustainability information relevant to all business stakeholders – investors, shareholders, regulators, and other stakeholders. Basis India’s NetZero 2070 goals to become a green champion, this BRSR makes it evident that sustainability reporting is as serious and important as financial reporting. How seriously will this be followed, and more critically how many regulatory decisions will be based on this, would be worth watching.

*Tailored: there will be no straight forward ESG Playbook; every entity is unique and while some commonalities could be borrowed from others, they have to have their own unique methods to achieve ESG transition.

*Transformation: will have to start from the very top of the entity; boards and CXOs have to be deeply involved as a critical project and not as a tick mark to be outsourced. The ESG journey will need business model changes; in manufacturing, it will need sourcing strategy tweaks as well.  

*Technology: will be big lever to track and trace and measure ESG milestones. Largely the efforts to achieve environmentally sustainable economic development will have to start with impact from the local level. Technologies available commercially today can help achieve M.A.D: Measurement-based. Attrition-proof. Digital-led.

*Talent : With the corporate and investing world adopting ESG practices, and with increasing queries around ESG from analysts and rating agencies, Indian companies will need to set up separate ESG teams that would work internally with all stakeholders. This function would also need to house talent who understand business mechanisms, regulatory practices and hurdles, competitive landscape and importantly trends that are shaping their sector and allied areas. Effective ESG teams would have motivated individuals-business practitioners who can work with purpose-led plans with measurable outcomes. In short, those who are not just puppet PowerPoint champs! Talent shortage of ESG professionals in India across the ESG supply chain is north of a  lakh today and  could reach a need for over a million individuals over the next five to seven years. Early research or data shows that the Ability to attract Gen-Z and millennials employees improves with better ESG goals, work and outcomes in the corporates.  

*Temptations: Green washing as well as Green shaming, won’t work on the long term. In the short term, ESG-premium will work better in motivating better and wider adoption. Over a period of time, lack of ESG would attract a discount.  

Achieving an organisation’s ambitions in ESG and Responsible Investment will be a journey.  While there will be some “quick wins” for most organisations, this will be a multi-year journey impacting the entire organisation.  

*Governance 
A few weeks ago, just before it’s announced deadline, the regulator for capital markets, the Securities and Exchange Board of India (SEBI), changed its earlier stand that required the top 500 listed companies to separate the roles of Chairperson and MD/CEO (SEBI has defined ‘top 500 entities’ as those determined on the basis of market capitalisation, as at the end of the immediate previous financial year). With wordsmithing, this requirement has been diluted or even washed out by changing the term from “mandatory” to “voluntary”. The norms were a part of the series of recommendations given by the SEBI-appointed Uday Kotak committee on corporate governance in the year 2017.  

These aspects of a slower process of building stronger governance norms would delay the stakeholder confidence in their ability to bring in better corporate behaviour. Having said this, there have been a line-up of governance tasks that the regulator has made from the industry, including on the contagious Related Party Transaction (RPT) disclosures. Especially if as a market, we need to attract global capital to move from brown assets to greener India, we need to better every behaviour and disclosure. When in doubt, ‘disclose’! The ‘G’ of ESG is easy to measure or even report; at least with what’s not there.

We need to financially and technically equip regulators to take the required actions and work proactively towards our expected ESG outcomes.

*Better Future Needs Better Behaviour Today 

By 2070, India will be a wealthier country, with a significantly higher per capita income. The need for a net-zero carbon economy not only aligns with its growing environmental consciousness, but also bodes well for a low-carbon, circular economy.  It needs an inclusive developmental agenda, starting today. A society is a function of multiple individuals, shaped by ideology of “being good and doing good”.  Net Zero 2070 is not a mere goal, but a hope for better living standards for our future generations. But like all policy planning, we can’t live on hope and a prayer; we need measurable milestones and statement of disclosures annually on this Net Zero 2070 journey.


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