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If there is one common thread that ran through the ambitions of Indian companies in 2021, it was a race to adopt environmental, social and governance (ESG) norms, following mounting pressure from investors and regulators.

India ranks a lowly 120 among 165 countries in its progress towards achieving all 17 SDGs (sustainable development goals), lower than SAARC counterparts Sri Lanka, Nepal and Bangladesh.

Over a dozen companies including Reliance Industries Ltd (RIL), Vedanta Ltd, JSW Energy and HDFC Bank have jumped on the bandwagon to go carbon neutral in the next few decades. Some of them are also recalibrating their businesses to hit net-zero emission deadlines. They are tapping into newer pools of capital and shoring up valuations to attract investors in these reorganized entities, while enhancing shareholder value.

ESG is an integrated term used in the capital markets to evaluate corporate behaviour. Investors are increasingly applying these non-financial factors to their analysis to identify material risks and growth opportunities.

“As the hope of restricting global warming to 1.5 degrees recedes rapidly, there is a dire need for companies to reorganize their business processes to contain the worst excesses of climate change. In addition, companies are also realizing the value that ESG creates for businesses as consumers become more aware of their carbon footprint and ESG’s potential positive impact on business performance," said Nyrika Holkar, executive director, Godrej & Boyce.

Holkar said that companies will have to make strong commitments towards achieving net-zero targets and integrate the target in business goals. This will require a significant amount of transformation within organizations and can be achieved by setting science-based targets for reducing carbon emissions and improving energy efficiency.

It is little surprise then that Vedanta is restructuring its operations, which may include a demerger and subsequent listings of the aluminium, iron and steel, and oil and gas businesses as standalone entities.

Meanwhile, RIL is transferring its gasification assets to a wholly-owned unit, which will help it produce hydrogen to establish a hydrogen ecosystem. And JSW Energy is housing its green energy business in a new wholly-owned unit, JSW Neo Energy Ltd, while keeping the thermal business as part of the main company. The green business is expected to contribute more than 62% of JSW’s earnings before interest, taxes, depreciation and amortization.

“ESG action is primarily driven as a reaction to reporting and disclosure norms; with a mindset of value preservation or loss of value. A significant challenge remains that of mindset. To be aware and to recognize that there is a significant value creation potential in adapting to the new normal. Subsequent to which the journey becomes simpler and easier in evaluating the baselines, understanding the tech and financing availability, setting targets, generating and committing resources," said Sambitosh Mohapatra, leader - ESG/energy utilities and resources, PwC.

State-run companies, however, are lagging behind their private peers in ESG scores.

ESG data from ESG Risk Assessments & Insights Ltd, by Acuite Ratings, showed that of the Nifty 50 companies, 40% of private sector companies are rated ESG risk A. In contrast, only 14% of public sector units are rated A. Risk A indicates an ESG leader with a largely positive track record of managing material risks.

The analysis showed 48% of private sector companies, and 86% of public sector companies of Nifty are rated ESG risk BBB, indicating that the company has a good track record of risk management, but no evidence of a robust framework.

 

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