Several PSUs are taking steps to shift their business portfolios towards long-term sustainability, experts said
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India’s state-run companies continue to lag behind their private peers in environmental, social and governance (ESG) scores, a key criterion for fund allocation by global investors.
ESG data from ESG Risk Assessments & Insights Limited, by Acuite Ratings, showed that of Nifty 50 companies, 40% of private sector companies are rated ESG risk A. In contrast, only 14% of public sector units (PSUs) 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.
An ESG rating of BBB indicates that the company has a good track record of risk management but no evidence of a robust framework.
On the key issue of business ethics, private sector companies score an average 49%, whereas public sector companies score an average 48%. Business ethics refer to a company’s performance related to anti-corruption, fair competition, whistle-blower protection and compliance related to insider trading.
Experts said several PSUs are taking steps towards transitioning their business portfolios towards long-term sustainability. While the private sector may have been early adopters of ESG disclosures resulting in better ratings, they said PSUs also are fairly advanced in their disclosures.
“Our work with PSUs indicates that they are well aware of the relevance and importance of ESG and sustainability. As of now, this is not impacting their cost of borrowing or capital availability, especially for the well-performing and profitable ones, but several of them have taken steps towards transitioning their business portfolios. For example, Indian Oil is building India’s first green hydrogen plant at the Mathura refinery, and NTPC announcing plans for 60 gigawatt (GW) of renewables in the next decade. This is more with a view towards capturing the opportunities from energy transition but can help tell the ESG narrative more effectively. Another aspect frequently overlooked is the huge amount of work done by PSUs on the social dimension of ESG. They invest a significant amount in developing services and infrastructure for communities in the catchment areas of their operations and often do not get adequate credit for these contributions," said Suvojoy Sengupta, partner, McKinsey and Co.
According to Sengupta, several large PSUs are active in oil and gas, mining, power generation and steel, which are also the highest carbon-intensive sectors.
They have the opportunity to accelerate the adoption and commercialization of newer technologies and pursue newer product opportunities, Sengupta said, adding that these sectors are vital for the growth of the Indian economy, and so from a decarbonization and sustainability perspective, it’s important to take the right steps towards the net-zero 2070 journey.
On the issue of greenhouse gas (GHG) emissions, initiatives in reducing emissions from manufacturing activities, fleet emission and staff transportation are considered. Private sector companies score an average 46% on GHG emissions. Similarly, the analysis showed that public sector companies score an average 38% in the key issue of GHG emissions.
According to Kotak Institutional Equities, the current privatization policy may preclude most of the larger PSUs from privatization.
“We believe many PSUs, irrespective of their size, risk irrelevance, given their presence in challenged industries with a bleak future (fossil fuels) and challenging industries are seeing rapid transformation (financials). We doubt the companies are sufficiently geared to meet the challenges; continued government ownership may handicap them further. Anyway, we do not see much merit in sectors such as energy, financials and telecommunications being classified as strategic," it said in a note on 18 October.
The government had stated its intent to have a zero presence in non-strategic sectors and a minimum presence in identified strategic sectors. The four identified strategic sectors are atomic energy, space, and defence; transport and telecommunications; power, petroleum, coal, and other minerals; and banking, insurance, and financial services.
“If one sees the current strategy of PSUs that are dealing with fossil fuels, one can see the investments in operational eco-efficiency, the research and development and pilot project initiation across CCUS (carbon capture, usage and storage) and these companies are shifting into renewables. ONGC’s 2040 strategy clearly aims to reach 10GW of renewable energy capacity by 2040 through acquisitions. With the shift towards cleaner fuel, Indian PSUs have given public statements and are developing strategic road maps for their decarbonization levers which are going to enhance their ratings further," said Shailesh Tyagi, partner, climate change and sustainability services, EY.