Making sense of sustainability6 min read . Updated: 17 Jul 2012, 02:01 PM IST
Making sense of sustainability
Making sense of sustainability
New Delhi: Ravi Narain, Managing Director and Chief Executive of National Stock Exchange of India Ltd; Rajat Kathuria, economist and in-coming director, ICRIER; Sivasubramanian Ramann, Executive Director of Securities and Exchange Board of India (Sebi); Seema Arora, Executive Director at CII-ITC Centre of Excellence for Sustainable Development; and Samir Saran, Vice-President at Observer Research Foundation, were the panelists who took part in a Mint “Clarity Through Debate on business responsibility and sustainable development organized in association with the Indian Institute of Corporate Affairs (IICA) and the Desutsche Gesellschaft fuer Internationale Zusammenarbeit (GIZ) GmbH. Mint’s deputy managing editor Anil Padmanabhan moderated the discussion. Edited excerpts:
Padmanabhan: Sustainability is not possible without inclusion. Environment has to be seen holistically. Is there a business case for sustainability?
Saran: I am not sure about there being a business case for sustainability because there is no agreement on how we define sustainability. You saw Rio +20, there was no agreement among various nations on what sustainability is. But governance is something that can be measured. We have tried to create a method where we measure energy and emissions. We see these two as a proxy for governance. Any company with good governance will be efficient with its fuel consumption.
Padmanabhan: If we look at the guidelines laid by the (National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business by Ministry of Corporate Affairs) ministry, they are more holistic.
Saran: Here again, we have to separate sustainability from social enterprise. If you were to tag your social ventures as corporate social responsibility, CSR, then I think you are confusing the cost of employee with CSR and that’s not right. That’s what most of the companies do. They try to project workforce infrastructure development as giving back to larger society. I think, these two have to be segregated. Up to the 90s, companies were hiding that they were making profit. Because the companies were projecting themselves as not profitable, they didn’t have to do much for others. Post 90s, profit became the mantra and then inclusion didn’t matter. And until 2007-08, it was the mantra. Only in 2009, social inclusion was introduced in the budget by UPA (United Progressive Alliance). The issue is, social transformation and growth are not linked.
Padmanabhan: As a regulator, how do you see it?
Ramann: I agree there is a business case in this whole move towards sustainability. If inputs are costed correctly, that is where a company is going to go forward, and make the best of whatever inputs are available and discard the expensive one and take on what is cheaper. We should bring that out more clearly.
Padmanabhan: You mean include the environment and social cost in the price?
Ramann: We are talking about moving ahead, looking clearly ahead at cost, which is real. One good thing that happened was the BSE green index. So, why not put out a simple number on which companies could be graded. That would certainly be good step forward.
Kathuria: One of the classic reasons for market failure has been that the externalities. It is not the inability but the complete dissociation from firms’ point of view to include those costs, those externalities into cost of production, which gives rise to market failure issue. The question is how to get firms to do that. There are two ways, one is voluntarily, or force companies to include those costs and therefore get the desirable results. The world is experimenting with carbon credits and standard for environmental sustainability and jury is still out there. But the problem is market failure and addressing that market failure, culture is also important. Do we have the culture of compliance in our country or not. So getting the firms to do it is a long road ahead. One of the ways in which compliance happens is through a strong institutional structure. Nor are we that sanguine about market any more, that the market is going to lead to the outcomes that are desirable, neither is the world. The way, to get the market to achieve the desirable outcome, is the institution structure that has sound enforcement and the right market incentives.
Padmanabhan: Samir you said growth and social inclusion are delinked at this point of time. Do you think these incentives can be a bridge?
Saran: I am not a believer in carrots. I think sometimes sticks are needed too. Now, I am not saying that should be done. The Greenex is a good way of doing it, you are listing good performers. Then, like Ravi (Narain) mentioned, hopefully we can ensure that funds flow to these performers. What is not happening today is that you are creating institutions and standards, but funds are not necessarily being driven to those performers in that framework. I completely agree with Ravi, unless bankers start backing good performers, good governance and social practices, you are not going to see companies either hurt enough or incentivize enough to change.
Padmanabhan: It is clear that we need incentive structure. Now the big debate is whether you follow stick approach or a carrot approach.
Arora: In our country pressures and dilemmas are completely different at the moment. I don’t think we can say that this is the only route by which we will get the results we really want. Also, culture has to play a major role here in a way we change the behaviour and the way industry responds to certain things. There is certainly a case in providing some kind of incentives for good performances. They could be different types of incentives, market-based incentives, financial incentives or recognitional incentives, we can start and experiment with. The important point is the entire ecosystem at this moment is rewarding corporate performance on quarterly performance. If that is going to be the main metrics, then obviously the ecosystem is not rewarding anything else the corporates do in terms of value creation on sustainability. So, the system has to work together to make that happen. We need to bring consumers on to the table. We need to have mix of incentives and gradually move to disincentives. But we are not mature enough to start immediately with it.
Ravi: Can we ask every institutional investors to put out in public domain what their assessment is for each corporate they have invested in, on their ESG (Environment, Social and Corporate) view, ESG action and sustainability.
Padmanabhan: Raman, as a regulator, can the disclosure be expanded to include these?
Raman: Most certainly. The facts is the initiative of ministry of corporate affairs has given the way forward for regulators like us. And it is something that is probably going to come out soon on how to get companies to make better disclosures. It is active work in progress, be it a listing agreement or any other form, the companies will be bound legally to bring out disclosure with regards to ESG.
Padmanabhan: What can be the collaborative mechanism that can be put in place, which will incentivise whether through carrot or stick, or its combination.
Rajat: It can’t be either carrot or stick approach. It has to be both. What works better is a carrot approach. A stick approach would work well in trying to establish culture of compliance if you have credible enforcement. Unless you are going to be able to enforce standards on whether environment or carbon, the stick approach is going to be difficult. But it can’t be either-or approach. Some good case studies show that carrot approach is a good approach, but a stick, enforcement and penalizing the non compliers is going to create compliance culture in the future.