Making Indian businesses sustainable
Companies will accelerate their commitment to long-term social and environmental well-being only if India builds an ecosystem of sustainability drivers.
Corporate sustainability isn’t yet a fully realized idea in India. Several leading companies consider social and environmental issues to be as important to their business as financial growth, but many do not, and most aren’t thinking of sustainability as a core strategic priority.
The idea of sustainability is not new to the country. Principles of social and economic justice were enshrined in the Indian constitution (pdf) in 1950 and implemented by the state through many socially sensitive policies, including affirmative action. In the 1970s, India also began to focus more sharply on safeguarding the environment. Several laws were put in place, and the Ministry of Environment and Forests came into being in 1985. In the seven decades since Indian independence, the country’s large public-sector enterprises, nationalized banks, and state-owned insurance companies have consistently implemented initiatives directed toward economic growth and distributive justice. The country has also signed on to most major international conservation treaties related to habitat, species, and environment.
Sustainability suffered, though, as the Indian economy was liberalized in the 1990s. Led by private corporations, liberalization kick-started a period of rapid GDP growth and helped India cut multidimensional poverty in half. But there have been environmental costs. Seven of the 10 most polluted cities in the world are in India. Protected forest lands have been opened up for mining, road and rail construction, oil drilling, and pipeline and canal construction. And despite progress on poverty, it remains a major challenge. According to the United Nations Development Programme’s 2018 Multidimensional Poverty Index, a staggering 364 million Indians continue to experience acute deprivations in health, nutrition, schooling, and sanitation. And inequality has worsened dramatically over time.
India can’t afford to pursue further business growth without embracing sustainability as an essential part of the corporate agenda. It’s imperative that the government, financial markets, and CEOs step up their commitment, and that civil society and the media actively influence public opinion and policy.
Current programs aren’t good enough
In 2013, India became the first country in the world to make corporate social responsibility (CSR) mandatory. Indian companies with net profits greater than approximately US$700,000 must spend 2 percent of their profits on CSR activities. But pursuing CSR is much easier than using the three Ps — profit, people, and planet — to run a business’s core operations and measure performance. And there’s currently little pressure on business leaders to make this fundamental change in how they address sustainability.
According to a survey (pdf) of Indian executives by the Global Compact Network India — one of the country’s largest corporate sustainability initiatives — Indian business leaders are focused primarily on regulatory compliance, not core sustainability. This is unsurprising, because 90 percent of CEOs surveyed reported that they face no pressure at all from investors to move the needle on sustainability. Pressure will need to increase, and from all angles, for India to make rapid progress.
Government must continue to be the biggest driver
The CEOs surveyed suggested that if India wants to promote corporate sustainability, the most effective drivers are government regulations and standards, subsidies and incentives, and public investment in green technologies.
Several highly polluting industries need urgent government attention. India’s coal-run thermal energy plants are among the most inefficient in the world, and many don’t meet the already relatively lax Indian standards for air pollution, water consumption, or waste disposal. The government has taken some steps to force improvements by defining standards, imposing a coal tax on the industry, and putting the Ministry of New and Renewable Energy to work on funding, promoting, and researching cleaner energy. However, in 2018, India met only 6.3 percent of the country’s target for the production of wind energy and 5.86 percent of the target for solar. Coal continues to pollute, and gas and hydropower are running far below capacity.
Another problem area that government urgently needs to address is the Indian automobile industry, which currently contributes 7.1 percent of India’s GDP. The government is moving toward (pdf) stricter emissions norms and is incentivizing the faster adoption and manufacturing of hybrid and electric vehicles. However, progress has been slow. Large-scale green public transport projects haven’t taken off in India. As of May 2019, India had only 280,000 electric vehicles, far from the government’s target of 15 million to 16 million by 2020. The government’s new budget, released in July 2019, includes allocations to support e-mobility, but it remains to be seen whether this funding will produce significantly quicker change.
There’s been a 136 percent increase in the number of grossly polluting units of industry in India between 2011 and 2018. These include pulp and paper mills; distilleries; sugar mills; textile units; tanneries; thermal power plants; food, dairy, and beverage units; chemical units; and slaughterhouses. In a developing economy, it’s impractical to stop new units from launching, but balancing growth with sustainability is critical. The government must “walk the talk” by implementing rigorous standards for new projects, particularly in eco-sensitive zones, and it must tighten both the benchmarks and the monitoring of corporate environmental performance.
It is equally important that the government recognize corporate efforts. A system of highly publicized government awards for companies that implement sustainability programs would encourage them to sharpen their focus. This carrot-and-stick approach to reforms has been effectively used in the past for a wide range of improvements, including reforms in tax administration, real estate, banking, and finance.
Financial markets must make bigger strides
International trends in sustainable and green lending are helping drive the corporate sustainability agenda in India, but more can be done.
There are encouraging signs that financial markets are making moves to encourage sustainability. State Bank of India, the country’s largest bank, has obtained lines of credit of more than $1 billion from the World Bank and Germany’s KfW for projects in solar energy and affordable housing. And as of March 2019, the State Bank of India had disbursed (pdf) $4.3 billion toward 656 completed renewable energy projects, and had an affordable housing portfolio of $37 billion. Similar examples exist among Indian private banks.
Also, green bonds in India have grown into a more than $6 billion market. Green “masala bonds,” issued outside India but in rupees, have been listed on international exchanges since 2015. And in 2017, the Securities Exchange Board of India finalized norms for the issuing and listing of these and other environmentally focused bonds. Both public- and private-sector corporations in India are now using such bonds to raise finance, especially for renewable energy projects.
Another positive trend is the growth in impact investments across a range of industries, such as financial inclusion, agribusiness, healthcare, education, and clean energy. Since 2010, investors have poured $5.2 billion into close to 350 enterprises in India, and those investments are expected to reach $8 billion by 2025.
However, the overall amount of green lending in India is still small compared to other types of lending. There’s also no pressure on banks to use environmental, social, and governance criteria while financing polluting projects or projects such as large dams, which cause various upheavals. In response to climate change and other environmental risks, Indian financial markets need to push companies further toward sustainability initiatives and sustainability reporting.
The Securities and Exchange Board of India took a step in the right direction by issuing a paper (pdf) in 2012 asking the top 100 listed companies in India (based on market capitalization) to release annual business responsibility reports. In 2017, this was extended to the top 500 companies. The reporting format is influenced by the standards set by the Global Reporting Initiative and based on locally developed principles of sustainability. However, the reports themselves make no sense in the absence of industry- or sector-wide scorecards that clearly separate the leaders from the laggards. There are no regulator audits of the reports and no accountability for projects listed in them. Given the scale of social and environmental issues plaguing the country, the current approach of slowly nudging companies into sustainability through annual reports is a case of too little, too late.
Indian stock exchanges have been responding to the global trend toward sustainable business. The two major stock exchanges in India — the Bombay Stock Exchange and the National Stock Exchange — have launched sustainability-based indexes (the S&P BSE Carbonex, the S&P BSE Greenex, and the NIFTY100 ESG). However, media and investors have not yet shown much interest.
More corporations must embrace holistic sustainability
Although there’s global evidence that becoming greener actually improves companies’ long-term financial performance, this effect hasn’t yet been strongly demonstrated in India. However, given the level of environmental and social risk in India, business leaders need to pursue corporate sustainability anyway as a prudent risk management strategy, and as a way to reduce costs.
For example, there’s a significant (and deepening) water risk in India that endangers businesses. Grasim’s pulp and fiber plant and Reliance’s plastics plant both had to shut down as a result of the strain on water resources. Similarly, companies face significant social risks if they don’t prioritize sustainability, as seen with last year’s protests against Vedanta’s Sterlite Copper plant and the 2015 demonstrations at Hindustan Unilever’s mercury plant. These situations are prompting companies to bring sustainability into sharper focus.
Many leading Indian businesses — Tata, Mahindra, and Birla, to name a few — have made great progress on sustainability, spearheaded by visionary CEOs and supported by capable senior teams. They’ve implemented major internal campaigns to reduce and recycle and to influence employee behavior. Their efforts have also enabled the creation of green supply chains, expanding the idea of sustainability to many smaller companies. The idea of a “circular economy,” in which waste becomes a resource, is also catching on. However, it’s still only the large, professionally managed companies that are focusing on these initiatives, and even they rarely address inequality in all aspects of the business, such as how they distribute profits, pay employees, and manage supply chains.
Civil society and the media must wield their influence
Customers are the most powerful source of pressure on companies. If the Indian consumer demands sustainability, business leaders will prioritize it and investors will be more likely to support it. Given the major, disruptive changes taking place in India — the telecom revolution, fast growth in the digital economy, and rapid urbanization — Indian companies have a real opportunity to “jump the curve” by creating sustainable products and services for customers.
If the Indian consumer demands sustainability, business leaders will prioritize it and investors will be more likely to support it.
There are signs that India’s consumers will bite if companies offer more green products. A Unilever study of tea and detergent markets (pdf) showed that customers from India were far more likely to make green choices than those in the U.K. (88 percent compared with 53 percent) and to recommend such products to others. In fact, all the emerging markets that Unilever surveyed showed similar trends.
However, in India, consumer awareness of green choices is still only a small urban phenomenon. Even when customers are aware of them, they don’t usually have enough actionable information to make sustainable choices. In the Indian textile industry, several certification processes — such as the Fairtrade mark, the Handloom mark, and the Khadi mark — enable the customer to make better choices. But in most other industries in India, consumers don’t yet have widespread access to clearly visible scorecards or certifications that provide insights into the sustainability of products and services.
Not surprisingly, only 31 percent of CEOs surveyed by Global Compact Network India said customers were a key focus area for them in their sustainability journey. To counter this trend, civil institutions must step up their efforts to research, publish, and influence public opinion on sustainability. As Raghuram Rajan argues in his book The Third Pillar, we need empowered communities, which can temper market forces and influence state policy. This approach has been successful in bringing about change in many countries around the world.
India has a strong legacy of civil society movements. Nongovernmental organizations (NGOs) have played a critical role in the enactment of many important legislative changes. Several NGOs provide consulting services to corporations and help companies implement their CSR activities, and they have the necessary skills to create an independent green rating system for India. It won’t be easy, but with support from the government, it can be done.
Governments in India have always been alert to popular trends, and have responded in the past with many pro-people policies. For sustainability to progress, it is critical that the voice of the common Indian be heard loud and clear. The Indian media has a major role to play in creating a groundswell of public opinion. However, the country’s current media dialogue on sustainability is weak. Companies that have embarked on major initiatives get little or no media attention, except what their PR firms can garner for them. Sellers of sustainable products and services depend on social media or word-of-mouth referrals. The Better India, a digital media company that tells stories of sustainability and sells sustainable products online, currently reaches an audience of 30 million per month. Such efforts are growing, but are not enough.
India needs an entire ecosystem of sustainability
There are other ways, too, that India can advance corporate sustainability. For example, the Indian education system — starting in primary school — needs to make social and environmental responsibility part of the core curriculum. Engineering and design schools must increase their focus on sustainable design. And the more than 3,500 business schools in India should offer courses that teach students the practical aspects of building and running sustainable businesses.
India’s sustainable future also requires many other enablers, such as research firms, innovation hubs, incubators, social scientists, auditors, lawyers, analysts, and talent search companies. Consulting companies and industry associations have begun to offer training programs, advisory services, and green-product certification. Such industry-led efforts need to be accelerated.
India has to create a dynamic ecosystem of multiple sustainability drivers that build on one another to amplify impact. It won’t be easy to create — but that’s the nature of ecosystems. Many parties must come together, and they’re not built overnight. If India can do this, though, it could become a model of corporate sustainability for the rest of the world.