ESG Mantra: Measure Well To Manage Well

Improved understanding of the impact of climate, water, forest and biodiversity has led to sustainability becoming a critical factor in the investor market. According to the Global Sustainable Investment Review 2020, sustainable assets account for almost 36% of all professionally managed assets in the world. Transparency in understanding and reporting emissions as the first step towards decarbonisation is being accepted globally in investment decision-making.

In India, the CDP sample until 2022 comprised 200 listed companies of the Bombay Stock Exchange (BSE), which has been increased to 1,000 companies aligned with the business responsibility and sustainability reporting requirement of the Securities and Exchange Board of India (SEBI). But is this disclosure enough to estimate the country’s emissions?

The National Stock Exchange of India (NSE) website shows 2,113 listed companies as of December 31, 2022, while the BSE has a listing of 5,311 companies as of January 2023. Market capitalisation of the BSE is around Rs 282.13 lakh crore, while the NSE shows a market capitalisation of around Rs 275.67 lakh crore. There is no limit on the number of companies that can be listed, and the number is growing every year. Since companies can list themselves in both exchanges for visibility, the numbers vary year by year. Additionally, with the introduction of dedicated platforms for the small and medium enterprises, both the BSE and the NSE show an increasing trend of SMEs in the list.

While sustainability reporting by the top 1,000 listed companies is a starting point, it may be just scratching the surface when one looks at the overall sustainability impact in the Indian economy.

The world of disclosure and reporting is complex. If large companies with trained teams dedicated to sustainability are struggling, to expect smaller companies to generate quality data is unfair. Multiple non-financial reporting guidelines, frameworks and requirements make disclosure challenging. While there is a lot of buzz around ESG reporting, and there has been more than a tenfold increase (as reported by the World Business Council for Sustainable Development) in the number of ESG reporting requirements over the last 25 years, there is a need to look at frameworks around which this reporting is based and how much data is validated.

Quality of data is not synonymous with the increase in the quantity of information being published by companies. What is being done to manage environmental impacts within the business? Does this lead to action? Is it really contributing to the country’s decarbonisation process? During this period of increased disclosure and reporting leading to sustainable investments, how much emission has decreased and what is the impact on environmental regeneration?

The total estimated value of opportunities identified by Indian companies reporting through CDP in 2022 is approximately Rs 3,000 billion, which represents a 10x increase as compared to 2021. This is mainly because of the inclusion of green hydrogen as a crucial opportunity and shifts toward cleaner energy. It is also noteworthy that the highest fiscal impact of opportunities lies in direct operations, particularly under products and services. The financial impact reported from climate-related risks was estimated to be Rs 2,842 billion by Indian companies responding to CDP. Of the 122 Indian companies disclosing to the climate change questionnaire in 2022, 93% have identified a potential financial or strategic impact on business performance from climate opportunities. What gets measured gets managed, and this transparency can provide the basis for action toward reducing emissions. However, the overall reported risk is 15% less in 2022 due to a small number of companies reporting from industries such as metals and mining, oil and gas, and financial services.

Today, much of the production of larger companies is in Asia. Supply chains have several layers and suppliers are increasingly outsourcing to smaller sub-contractors, which makes tracking the supply chain increasingly difficult. While advances in technology including artificial intelligence, blockchain, satellites, etc. give companies new tools for measuring, in countries like India, the capacity of smaller companies—many of which may be one-person contractors—makes disclosures on complex questionnaires almost impossible without technical support and re-designing of the process of gathering information.

This year’s analysis of our data shows that direct sources (Scope 1 and Scope 2) still cause most emissions across all three scopes due to the use of fuels in direct operations. A significant increase in Scope 3 emissions reporting can also be observed among companies disclosing to CDP from 15% in 2020 to 41% in 2022.

Interesting trends can be seen on the distribution of companies reporting on different Scope 3 categories. From the emerging data, it is evident that categories like business travel and employee commuting are by far the most reported categories pertaining to ease in data collection and gathering. The maximum change is observed in the categories of purchased goods and services and fuel and energy-related activities. Many other categories do not have enough data and require more efforts and strategies if we want the larger picture.

Disclosure and reporting must not be seen as the end but as a means to creating the impact required to mitigate climate and environmental damage. Companies need to ask themselves what their environmental risks are from not estimating emissions with transparency. Questions like whether the priorities are right, and what material issues have significant negative impact on environment and people, require more transparency in responses. How to leverage on opportunities identified and contribute not just to the growth of the company but also to stakeholders and society is important and can go a long way in generating data that weaves in action.

There are various challenges that companies report while maintaining this transparency, such as the complexity of supply chains, limited access to low-carbon energy sources and a lack of expertise in decarbonisation strategies. However, there are also a number of levers that companies can use to amplify action.

One of the key levers is energy efficiency. By improving the efficiency of their operations, companies can reduce their energy consumption and lower emissions. Renewable energy is another strong lever. Companies can explore low-carbon fuels as well as carbon capture and storage technologies.

Companies need to engage directly with their suppliers and customers to encourage them to adopt low-carbon practices. This can involve setting emissions reduction targets for the entire value chain, as well as provide opportunity to collaborate with suppliers to improve their sustainability performance. Companies can also promote more sustainable practices, such as reducing waste or choosing low-carbon products. This requires a deeper level of engagement not just by disclosing on the supply chain but also facilitating and handholding the process of disclosure.

For data and disclosure to create the desired impact of contributing to a sustainable global economy, there is a need for corporate leadership that drives transparency and creates consistency on all performance indicators, including the ones where the company is underachieving. Transparency is also required on how the numbers are calculated, in line with the latest methodology, making it accurate. In the end, using key indicators at the centre of disclosure with illustrative examples can enhance the quality of data and help in estimating emissions.

Prarthana Borah, Director, CDP India