India Inc’s race to raise the ESG quotient

“Earlier, it was very easy to raise money at competitive rates given that everyone was betting on India’s growth story," said the CEO, who requested anonymity. “But nowadays, one needs to answer all kinds of questions—from our (persisting) exposure to conventional (energy) projects that contribute to global warming to the number of women on our board or in our ranks."

“We will get there," he added.

Troubling questions are rippling through the rest of India’s corporate landscape too, introducing a newfound urgency among both listed and unlisted firms to get their house in order. The push is mostly investor led. Recently, the market regulator—Securities and Exchange Board of India (Sebi)—also made Business Responsibility and Sustainability Reporting (BRSR) mandatory from the fiscal year 2022-23 for India’s top 1,000 listed firms. These disclosures are voluntary this year.

For the companies themselves, the reasons for any motivation are varied. While some firms view the shift as a natural response to the unfolding global climate crisis, for others, gaming the ESG quotient is a smart way to raise cheaper funds in an ever-competitive business environment, which has undergone further upheavals due to the covid-19 pandemic.

Whatever may be the case, the Sebi directive couldn’t have come at a better time. In early August, a new UN Intergovernmental Panel on Climate Change report declared a “code red" and warned that extreme weather events could become more common in India and South Asia under a business-as-usual scenario.

But despite the obvious necessity and the rising investor interest in seeing tangible changes in how businesses are run, the sailing is not likely to be smooth. Experts warn that efforts by some firms to raise the ESG quotient might end up as an exercise in mere optics.

The fact that India has no official standard for what constitutes ESG is also a pain point. Many firms will inevitably try to game the system and the lack of a standard will only make it easier. Ultimately, for the global ESG push to have a meaningful local impact in India, transparency, measurement and intent will all matter greatly in the months ahead.

Times they are a-changin’

Consumer goods companies to those present in the carbon businesses and even some state governments have suddenly jumped on to the ESG bandwagon. “The need to improve on the ESG quotient will drive the behaviour of old economy firms," said Sambitosh Mohapatra, leader for ESG, energy utilities and resources practice, PwC India. “We will see impact investing driving transactions. Even governments are willing to differentiate between corporates, by providing tax incentives or altering sourcing and procurement norms in favour of those who make an ESG impact."

“Apart from the economics of it, the ability to attract talent will also be impacted (going forward), with the next generation keen to work with ethical and sustainable companies," added Mohapatra.

Currently, many Indian firms don’t rank very high on the social and governance matrix, which includes parameters such as employee well-being, social impact assessment and well-functioning anti-corruption and anti-bribery policies.

“While the climate change crisis demands a comprehensive response, it is equally important to factor in the social impact of every project," said P.V. Ramesh, CEO of corporate strategy and management at Megha Engineering and Infrastructure Ltd (MEIL), an infrastructure major.

“Capitalism can’t be heartless and driven only by the profit motive. Private enterprise, in its own interest, ought to incorporate ESG in all facets of its operations. Investment firms also, whether they are making equity or debt investments, must not only make a commitment but also ensure that environment and social impact are mainstreamed into corporate governance. It is important that they recognize these elements are at the core of sustainable development and have a big impact not only on fundraising and the return on investment but on the very future of capitalism," Ramesh added.

It was under Ramesh, a former IAS officer of Andhra Pradesh cadre, that the state-run firm REC Ltd, which loans funds to the power sector, became the first Indian corporate entity to raise green bonds.

Now, ESG bonds have taken the financial world by storm. According to Moody’s Investors Service, the global issuance of green, social and sustainability bonds is expected to touch $850 billion in 2021. Attracted by the terms on offer, Indian firms have also joined the party.

To be sure, some Indian conventional energy firms have been nimble enough to make a green energy pivot. Mukesh Ambani-controlled Reliance Industries Ltd plans to set up 100 gigawatts (GW) of solar energy by 2030 apart from giga factories to produce energy storage, electrolysers and fuel cells. Meanwhile, Sajjan Jindal-led JSW Energy Ltd intends to have an energy portfolio dominated by green and renewable sources (at least 85%) by 2030.

JSW Energy has already started work on separating its clean energy and conventional power generation businesses. JSW Future Energy Ltd recently inked a pact with Australia’s Fortescue Future Industries Pty Ltd for green hydrogen production, and JSW Hydro Energy Ltd raised $707 million through its first-ever offshore bond issuance.

“The world is changing. These technologies are changing the world and they are also economically viable. They are cheaper than the conventional solution," said JSW Energy joint managing director and CEO, Prashant Jain.

“We have talked about this very clearly that we will become a net-zero (carbon emission) company by 2055. By then, our thermal capacity will totally get retired," Jain said.

This comes in the backdrop of growing traction for new generation emission-free fuels in India, with the government considering a proposal to make it mandatory for fertilizer plants and oil refineries to purchase green hydrogen.

Even as India’s per capita emissions are just about one-third of the global average, it is already working on a raft of measures, including clean electricity, ethanol-blended fuels and green hydrogen to meet commitments which were made at COP-21, the UN climate change conference held in France in 2015.

With the Indian government strongly backing the green shift, at least the environmental part of ESG is likely to be a keenly watched space in terms of compliance requirements for quite some time. This has already created opportunities for those who have expertise in managing the unfolding transition. Rating agency CRISIL Ltd, for instance, recently launched its ESG scores for 225 companies across 18 sectors.

“ESG is already playing a material role in the decisions of governments, regulators, investors, lenders and corporates," said Ashu Suyash, managing director and CEO, CRISIL, in a recent statement. “Our survey shows over 80% of issuers and institutional investors intend to integrate ESG in their decision-making."

Turning a corner

The coming green shift is nowhere more evident than in the trajectory of NTPC Ltd, which was formerly known as National Thermal Power Corporation Ltd. India’s largest power generation company is now firming up the initial public offering (IPO) plan for its green energy-focussed subsidiaries, NTPC Renewable Energy Ltd and NTPC Vidyut Vyapar Nigam Ltd. NTPC plans to reach 60GW of renewable energy capacity by 2032 (from around 4GW today).

Yet another conventional power major, Tata Power, has also begun to chart a strong green energy trajectory. “This is only the start for Indian companies. As responsible corporate citizens, we need to understand climate change impact and move in the right direction," said Praveer Sinha, managing director and CEO, Tata Power.

“Climate change is a reality, as seen by the recent floods in Germany, cyclones on India’s west coast, or the fires in Australia and US. Extreme weather events are sweeping across the globe. The next generation will judge us poorly if we don’t address climate change comprehensively," Sinha added.

India recently crossed the 100GW milestone in installed renewable energy capacity and currently runs the world’s largest clean energy programme. According to the apex power sector planning body, Central Electricity Authority (CEA), by 2030, the country’s power requirement would be 817GW, more than half of which would be clean energy.

In the run-up to United Nations climate change conference, also known as COP-26, which is set to be held in Glasgow, there is a renewed focus on India’s efforts to combat climate change. “Given the ESG focus, both public and private companies are trying to get their act together," said Somesh Kumar, power and utilities leader, EY India. And investors have taken notice of this.

“There are global investors lining up from new investor destinations such as Nor- way, France and Italy to put money in India’s booming green econ- omy," said BNP Paribas India CEO Aymar de Liedekerke Beaufort.

Concerns galore

But although change is clearly afoot—aided both by global and local factors—not everyone is convinced that the pace of India’s transition is sufficient to make a real difference.

Experts are also concerned about the limited progress on the social and corporate governance verticals. They also warn that in large swaths of India Inc, ESG has just become a buzzword to raise cheap funds instead of the matrix being viewed as a tool to introduce long-term organizational changes.

“We don’t have a standard or a de facto standard for an ESG framework in India. As a result, it is quite hard to comment about how ESG as an issue is being addressed among companies and investors," said state-run Convergence Energy Services Ltd (CESL) managing director and CEO Mahua Acharya. CESL is trying to push green mobility along with its parent entity, Energy Efficiency Services Ltd (EESL). CESL aims to put 200,000 electric two-wheelers and 300,000 three-wheelers on India’s roads in the near future.

“The ESG focus is here to stay for sure. It is different this time," said the head of one of India’s largest clean energy firms, who requested anonymity. “However, it is also true that some people are using ESG for doing greenwashing. The whole idea of the ESG transition is to balance the obligations to the environment and to society. While corporate actions can take care of governance issues, what one does for society in terms of improving lives also matters. To implement it honestly involves investment, commitment, training and real transition," he said.

“For some, it is (a) marketing tool and not a belief," added the person.

The view that some firms are “turning green" as a short-term superficial measure finds favour with Sanjay Aggarwal, global head for solar at Finland’s state-controlled power utility Fortum Oyj.

“ESG is not a label, but it’s a way of doing sustainable business. Many businesses have embraced it decades back and it is firmly in their DNA and they don’t have to position themselves with the new narrative in town. But some are discovering its virtues now when faced with (an) existential crisis. But can they change colour overnight? After all, organizations are living organisms. They can’t change their ways of working overnight. So, they are busy changing their narrative and positioning first," said Aggarwal, who is also managing director of Fortum India Pvt. Ltd.

“After disastrous oil spills, automobile emission scandals, the impact of greenhouse gases and pollution, workforce conditions and endless corporate misgovernance, the chickens have come home to roost. Investors have been punished and, therefore, they are back to (the) drawing board with ‘ESG compliance’. And ESG entails not only changing the hardware but most importantly, the software, i.e, the personality trait," Aggarwal added.

Thus, whether the software changes is the real question. The necessity to develop a more humane corporate landscape has never been more acute. The ball clearly is in India Inc’s court.