Corporate Sustainability in India is not sustainable, especially in its current state of awareness with the key decision makers in the higher echelons of the corporate world. Contrary to the general belief that corporates choose to merely comply, we are witnessing increasing number of corporates resolving to incorporate sustainability in their business. This growing intent is not adequately supported by the conviction that Sustainability can make a material impact on both the Business financial results and on the environment. Through this article, Capt. Tapas Majumdar, Founder Director, The Sustainability Practitioners makes his case on the Business and Environment impact of Sustainability.
Growth of Sustainability this far is largely driven by investors and regulators. This is especially true for those doing business with EU, who are currently leading the change. There is a definitive shift; if the CEO of BlackRock, Larry Fink, annual letter to CEOs is anything to go by. Larry acknowledges that the events of 2020 and the need for companies to transition to a net-zero economy and that throughout 2020, investors invested 96% more in sustainable assets, over 2019. The stellar rise in the number of ESG funds in India and globally, is another strong indicator of the definitive shift of investments and regulations towards ‘Sustainable Businesses’.
There are a growing number of countries outside the EU who are picking up the clue and have put in place their own Sustainability agenda and frameworks, like, China, Singapore, South Africa, UAE, Australia and New Zealand and India, to name a few. Sustainability has decisively moved from ‘Nice to Do’ to a ‘Must Do’, we now need to move towards a more purposeful and impactful oriented sustainability agenda. It is now that companies can lead the change rather than trailing the change and stay ahead of the curve because we are already seeing sustainability impacting business.
Material Impact Point 1:
“Sustainability is impacting business already. It is not about your product or service being Environment friendly, it is about the way you manufacture and / or deliver your services.”
Tesla was removed from S&P 500’s ESG index in May 2022. The regulator explained that Tesla’s “lack of a low carbon strategy” and “codes of business conduct,” along with racism and poor working conditions reported at Tesla’s factory in Fremont, California, affected the score. Tesla shares fell 6% and it looks like they will close year 2022, 30% lower. ExxonMobil, in the same period, was preferred due to its improved performance on Sustainability parameters.
Material Impact Point 2: “The quality of your sustainability report is assessed by the impact of your sustainability practice and the data points are collected not just from within the company, but external sources as well”.
Speaking of Business impact, sustainability practice was always understood to be practiced by your company. While this still stays relevant, those whom with you do business with are also increasingly getting roped in defining your sustainability practice, and it is impacting your business. The point in case is Adani Ports and Special Economic Zone Ltd. The company had a commercial contract with the Government of Myanmar for developing some of their commercial ports. With the military takeover, regulators in various geography discouraged business with Myanmar due to reports of human rights violation. Many companies, including Adani Ports and Special Economic Zone Ltd., were impacted. Adani Ports and Special Economic Zone Ltd., was removed from the ESG listing by the regulator.
Adani Ports and Special Economic Zone Ltd. experienced an exodus of investors in the run up to the expulsion, and they saw a dip of 7% in their share that took nearly a quarter to recover. Additionally, they had to exit the investment and had to write down of appx. US$127 million.
Material Impact Point 3: “Sustainability has decisively moved towards inclusion of those whom you do business with. The quality of your Sustainability practice will allow you a premium with regulators, investors, suppliers and customers. Leading the change will make your business more resilient.”
All Birds, a company listed in the USA, that manufactures shoes, adopted ‘Sustainable Manufacturing’. They choose to manufacture their shoes using marina wool that used renewable and natural sources for manufacturing. While lifestyle revolution was focusing on clothing, shoes however was not keeping up, which was their opportunity. All Birds, through inclusion of sustainability in their business strategy, not only got the focus back on shoes, they also created a niche segment of high end “Sustainable” hoes. Since listing in 2019, All Birds had lost 75% of its market cap, and had never made a profit since its inception in 2015 till early 2022. However, through all its turns, All Birds never saw a slump in demand on either side of the Atlantic, including in Australia and New Zealand and has already gone through five rounds of funding till date. It continues to remain investors preferred stock.
Material Impact Point 4: “Sustainability is a Strategic Function and influences strategic outcomes that relate to profitability, continuity and decisively announces the responsible credentials of your business with respect to the environment.”
While investors and regulations are the key drivers of the sustainability efforts globally, the main beneficiary is your business itself. The main reason why you should engage in Sustainability Practices is for your own business growth. The compliance and branding necessarily needs to be a subset of this. Heineken sets the right example of how a company can benefit from sustainability and they achieved this much earlier in 2015. From responsible sourcing from local farmers in Africa to reduced energy consumption and increased use of renewable energy and inclusion of circular economy in waste disposal is a good example of a company integrating sustainability in deriving profitable, equitable, inclusive and responsible growth.
Material Impact Point 5: “A going concern already has an ESG footprint. The key is to align it with the profit motive in an environmentally responsible manner. It is not the big thing that matter, it is the smaller things that are the gamechanger.”
ORIENTING SUSTAINABILITY FROM BUSINESS PURPOSE
Sustainability needs to be aligned to business. This starts with a serious introspection of the risks and opportunities (and I emphasize opportunities) the business faces currently and in the foreseeable future. This is done through a material mapping activity. All aspects of risks and opportunities to the business must be identified and then plugged into E, S and G categories, for further consideration of risk mitigation and opportunity maximization. Your business is a going concern, so it has been dealing with risks and opportunities in its normal course. One of the earliest published material map that gave a clear linkage to business was that of Nestle1. Though not mandatory to publish, the company did publish the material map. This brought to light the clear thinking within the company and the linkages to business.
Improving ESG performance can also help lower operating costs. There are a number of ways ESG can help lower operating expenses. ESG often focuses on reducing energy consumption, which can help companies save money on utilities.
Gazeley is a leading developer, investor and manager of European logistics warehouses and distribution parks with a 17 million sqft portfolio concentrated in the strategic logistics markets of the UK, Germany, France and the Netherlands, in addition to its operating portfolio, which is 98% leased to blue chip customers such as Amazon, UPS and Volkswagen. The design integrates ESG factors in construction of the logistics warehouse. In 2020, GLP, investor and developer of logistics warehouses and distribution parks, announced the delivery of the first net zero carbon development to be officially verified as Net Zero carbon for construction in line with the UKGBC Net Zero Carbon Buildings Framework Definition. Overall, the design has resulted in a 25.8% reduction in embodied carbon compared to a standard logistics building. They achieved this through a combination of initiatives that included roof top solar power generation and ergonomically designed workplaces. These, in turn, reduced the energy bills, reduced waste, and improved productivity. The occupants enjoyed the benefits of a reduced operating cost at greater productivity.
With the right and well planned ESG implementation strategy, the impact on cost of operations can even exceed 25% and that is significant. In addition, ESG emphasizes strategies to reduce water and raw material usage. As these resources become more expensive, ESG can help companies save money by eliminating waste and improving resource efficiency. ESG is GOOD for Business. Early adoption of ESG, especially for startups can be the difference between surviving and thriving.
In conclusion, I would say that to be in control of your sustainability agenda, is the best way to maximise from it. To maximise, it necessarily needs to purposeful. Sustainability strategy is made at the corporate level, however the success of it is measured at the impact level. Sustainability practice of your company must align to business and environment goals and ensure a transparent and verifiable method for stakeholders to validate. The marketability of such document then becomes incidental and not core, paving the way for business continuity and greater acceptance as an environmentally friendly company.