India Inc. faces ₹7.13 lakh crore climate change risk

Corporate Inc., both in India and abroad, has a huge problem. It has an elephant in the room. But just as the six blind men in the parable, the board can’t figure out what the elephant looks like. The animal in question is sustainability. Everyone knows that it exists but none have been able to figure out what it exactly looks like.

This is after the Financial Stability Board, the Basel-based international body that monitors and makes recommendations about the global financial system, has created a Task Force on Climate-related Financial Disclosures, and not to mention the UN’s social development goals.

Yet, despite efforts by companies, a recent global report by non-profit, Break Free From Plastic movement, states that of the 265 corporate projects running from 2018 to April 2021 aimed at plastic waste recycling, 226 were dubbed as false solutions. Of the 214 direct projects driven by FMCG companies, 176 were labelled as false solution projects. Ranked from absolute worst to least worst, Procter & Gamble topped the list with Unilever at the bottom. Net-net all are still offenders.

For a corporation that’s like a sock in the jaw because whatever they do will fall short of green expectations. Having said that, environmentalists also need to know that there are no easy answers to the problem.

According to CDP, a non-profit that runs a green disclosure system globally, 39 listed Indian companies have put the risk to their business from climate change at a record ₹7.13 lakh crore (See: Green danger). Of the 39 companies, three financial institutions, State Bank of India (SBI), HDFC Bank, and IndusInd Bank, collectively have ₹6.08 lakh crore at risk, making up for 85% of the overall exposure. For SBI, most of the risk comes from its agri portfolio. In the event of a monsoon failure or unseasonal rains, there is a huge risk of crop failure. In the case of HDFC Bank, it is more related to assets damaged from flooding, while in the case of Axis Bank it is the exposure to high carbon businesses.

Putting SBI’s agri loan-book of over ₹2 lakh crore in context, chairman Dinesh K Khara says, “Our agri loans largely comprise Kisan Credit Cards (KCCs), that account for ₹1 lakh crore. Normally, as and when KCCs are granted, the situation that is likely to emerge is always kept in mind. These are short-term loans for a year or so and while reviewing the credit we are cognisant of the prevailing conditions.”

While global warming has come home to roost, so have climate-conscious foreign investors who want Indian companies to come clean on their sustainable practices. CDP, , a non-profit that runs a green disclosure system globally, seems to have a pulse on India Inc’s sustainability intent and, separating it from the other green NGOs is the heft that it carries. For instance, the non-profit’s questionnaire sent to companies has the approval of 590-plus financial investors who manage over $110 trillion in assets. “We don’t just ask companies to report what they have done in the past but what they propose to do in the future. What are your targets, and if you have one, then how well are you aligning to that,” says Damandeep Singh, director (India) at CDP.

While there is no formal mechanism to track sustainability spends of Indian companies, 50 of 527 companies, from the combined universe of BSE 500 and NSE 500, which have, thus far, reported their audited FY21 financials, spent ₹3,813 crore in FY21 on corporate social responsibility (CSR). The CSR spend, in some instances, comprises environment initiatives that companies undertake. In FY20, the 525 companies had cumulatively spent ₹13,625 crore on CSR, largely an outcome of legislation in India, the only country to do so.

At the end of the day, like it or not, Nobel Laureate Milton Friedman’s assertion still holds true: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game.”

The fact that Indian companies especially in capital intensive sectors such as commodities and energy need to raise capital, listening to overseas investors has become a business imperative. As per data from Refinitiv, a global provider of financial market data, since 2015, Indian companies have raised $12.88 billion through green bonds.

As part of CDP's annual Non-Disclosure Campaign (NDC), a select few of the high impact companies, based on market capitalisation, are targeted by investors on a one-to-one basis and are urged to report to CDP. In the 2021 NDC, 12 investors, managing around $3 trillion in assets, are urging 39 listed Indian companies to disclose their environmental impacts. Some of the companies that are part of the list include Reliance Industries, Asian Paints, Bajaj Auto, HDFC, ICICI Bank. Of the 12 investors, some of the prominent ones are Amundi Asset Management ($1,630 billion), HSBC Asset Management ($478 billion), Aviva Investors ($448 billon), and AQR Capital Management LLC ($143 billion).

While ESG-conscious investors are asking companies tough questions and, legitimately so, there is no empirical evidence to show yet that these investors will stick around if a corporation was doing everything right on sustainability but getting it all wrong on the business. At the end of the day, what matters to these investors is also the return that they get. A green portfolio with blood-red returns won’t make for a pretty sight!

Back home, while regulations are still the driving force for sustainability, corporates can choose to be discerning about the environment that they are operating in. More than integrating sustainability in their annual reports, companies need to make it a way of doing business. Legislations are nothing but lighthouses—they are there for corporations to find their way out and not for them to shimmer under the lights. In essence, it’s essential for corporations to follow the law—both in letter and spirit.

While every company is doing its bit for sustainability in the way it feels right, the need of the hour is a scientific approach to address global warming. In the past there were none, but today there is.

For instance, today, a corporation can exactly set measures and targets to align its business in sync with global warming limits. It is known as the science based target initiative (SBTi), wherein the targets are considered ‘science-based’ if they are in line with the objective of the Paris Agreement of limiting warming below 2°C even as efforts are made to stay below 1.5°C.

But for that to happen, India Inc should view sustainability as a destination not a goal. What should matter to companies is how they choose to reach the destination. If they take the long circuitous path, it could be painful but worth the effort, whereas taking a short-cut might help them reach the destination but there will be none to raise a toast.

There’s no better way to know—whether it’s indeed an elephant—than by getting scientific about it.