The Weekend Read: The age of ESG

Welcome to this weekend’s edition of Lights On, a newsletter that brings you the key stories and exclusive intel on energy and climate change in South Asia.

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This week, an investigation by The Morning Context (here’s a detailed thread from the author if you can’t access the story) revealed how an industrial lobby group successfully persuaded the government to scrap its Corporate Environment Responsibility guidelines, effectively making it easier for businesses to get away with causing more harm to the environment. This is only the latest episode in a longstanding struggle between the urgency of tackling environmental degradation and climate change, and a system that often enables rogue businesses to avoid or ignore sustainability rules with almost no consequences.

While big groups such as the Indian multinational Reliance have pledged their own net zero target, other industries are at work to dilute environmental standards. One example is the continued extension of the deadline for coal power producers to install equipment which would dramatically reduce highly toxic sulphur dioxide emissions.

“It’s a minefield,” says finance expert Sandeep Hasurkar, this week’s interviewee. Is India really ready, or at least on the right track, to transform its industry and markets incorporating environmental and social practices in tomorrow’s business models? I looked for answers with Hasurkar, who has been an investment banker and policy adviser with leading financial institutions in India for the last three decades. Twelve years ago he took a break from the virtual world of high finance to work in the real economy, building and operating renewable energy projects for the infrastructure development company IL&FS.

Lights On: Companies around the world are incorporating environmental, social and governance (ESG) principles into their business models? What underlines this feeling of responsibility to society and the environment at large?

Sandeep Hasurkar: In Western markets and globally, a growing number of CEOs now believe that sustainability underpins the very existence of most corporates. Historically, corporations have been primarily profit driven, but over a period of time there has been a shift in the balance of power whereby a company, rather than just being limited to itself in terms of responsibility to its shareholders, is now seen as part of a larger ecosystem.

This dimension has become increasingly more relevant, and carries a lot of weight in terms of how businesses conduct themselves. This change required all companies, including Indian businesses, to adopt a multifaceted view of who their stakeholders really are, and engage in a more cooperative behaviour.

In this context, what’s different about India as compared to other countries, say the US or other major economies?

Firstly, the history of corporate systems in the US, in Europe, and in Asia and India are fairly different in terms of their origins and evolution. American markets developed in a fairly free-for-all frontier capitalism to which checks and balances of ESG were brought in subsequently by regulation and market developments.

Now, unlike the corporate history of the West, the first Indian businesses were, in the context of the times, fairly enlightened. There were a lot of social aspects that were woven into the fabric of how businesses operated, including providing free accommodation for workers, free healthcare and more.

Over the years, the share of industry and industrial activity has grown significantly, more so since the liberalisation of economic policies in the 90s. Global integration has also added to economic pressures of the market, and significantly more and larger infrastructure projects too have been taken up to provide [the] backbone for development. This has seen more on ground impacts along with a growing scientific realisation of environmental change and the need for sustainability. All of these combined have brought ESG issues more to the forefront of public discussion and regulatory oversight.

This sounds like a dynamic that may be present in many other countries too - after all big infrastructure is everywhere. Why does this matter more to India?

Because in India, typically, the density of population tends to be much higher. So for example, if you set up a project in Alaska, that would be probably discussed in Washington, maybe in the state itself, but other than that, the decision would have a relatively low ground involvement. Whereas in India, any big project would see an immediate on-the-ground impact.

Who would you say plays a bigger part in the spread of an ESG culture in India, is it businesses or the government?

It’s difficult to generalise, but I would say that the biggest part is played by the largest businesses who are doing well and want to stay ahead of the curve. Companies that have achieved leadership positions in the market do realise the importance of ESG to their sustainability, and that it makes eminently good business, besides appealing to the leadership's values.

Implementing an ESG policy is easier for a corporation, because it's a relatively smaller entity and if it subscribes to it, and it is in a position to absorb the costs, it can be done. When it comes to the government, setting up sustainability principles becomes an unwieldy affair and while the objective may be eminently good, there are occasions when it tends to get hijacked by pressure groups or local interest groups. So there are multiple challenges that lie ahead, it's a very complex and diverse kind of minefield.

And what about small and medium enterprises? In India, they account for 30 percent of the GDP and are growing - can the economy transition to a more sustainable model without them?

Other economies, in particular Western economies, have a transition map which involves a certain element of financial support along with regulation, and this makes the route clear and easier [for small businesses]. In the Indian context, given the resource constraints and the administrative issues involved, that roadmap is not something which can easily happen on the ground. What happens is that often the regulations end up being mere checkboxes. And smaller companies fighting a battle for survival, more often than not will see ESG rules as a “tick the box, file the papers” kind of situation.

Could this lack of a ‘roadmap’ which brings together government and industry ultimately hold back the deep spread of ESG practices in India?

The motivation behind adopting ESG systems are twofold. One is market led, which is why you're now seeing a lot of ESG impact funds coming in, a lot of green funds, because it makes good sense to finance and own a business which is ahead of the ESG curves. The other is the push coming from the government. In India there have been maximalist positions adopted in the past, which have been a challenge. For example, you've had large projects which have stalled at a demonstration stage, and while some of the missed requirements may have been reasonable, some were just utopic. The industry needs its business, the government needs development, but there isn’t a real space to find pragmatic solutions to this problem.

Hopefully, the rhetoric can be dialed down and we can find more practical ways of achieving holistic development.

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