Rs 12, 63, 800 Crore

IN FEBRUARY 10, 2010, the Church of England announced that it had sold its £3.8 million (Rs 27.7 crore) stake in Vedanta Resources. The church joined a growing list of institutional investors, led by the Norwegian government in 2007, which reduced or sold off their stakes in Vedanta amid growing environment and human rights concerns.
Vedanta is a U.K.-based metals and mining company controlled by non-resident Indian Anil Agarwal. Its aluminium refinery in Orissa was to be supplied with bauxite by the Orissa Mining Corporation. But the Ministry for Environment and Forests refused it permission to mine in the Niyamgiri hills. This in itself has not hurt Vedanta much; permission would have increased the annual capacity of its refinery from 1 million tonnes to 5 million tonnes.

The bigger loss was caused by the activism of its investors; institutions pulled out huge sums of money, while retail investors were prepared to sell out (some even at a loss). On the London Stock Exchange, its stock fell by 32%—from its 52-week high of £2,958 on Apr. 12, 2010, to its 52-week low of £1,795 on Aug. 10, 2010. Vedanta refused to comment.

Vedanta learnt the hard way that the cost of not going green could be very high. Almost a year before, in 2009, a McKinsey India report titled Environmental And Energy Sustainability: An Approach For India, showed what Indian industry was doing to go green, and what it was not doing. This year, in calculations based on the report and done exclusively for Fortune India, the consultancy shows how much it could cost India Inc. if it does not adopt more environmentally friendly and sustainable practices.

The report looked at five broad areas—power, emissions-intensive industries (such as steel, cement, and chemicals), transportation, habitats (urban and rural residences, as well as commercial buildings), and agriculture and forestry. It looked at the green initiatives taken by companies in each sector—reforestation, use of nuclear power, waste water management, afforestation, nutrient management (for foodgrain), alternative energy usage, etc. The report also recommended green methods not yet in practice: mixing clinker (a byproduct of coal) with fly-ash and slag in cement manufacturing to conserve limestone, solar heaters to reduce dependence on power from the grid, using energy-efficient light-emitting diodes (LEDs) instead of fluorescent lights, small hydro power projects for captive power consumption, and so on.

McKinsey's calculations show that not implementing these strategies could cost India Inc. well over €200 billion (Rs 12,63,800 crore) by 2030. This amount is calculated on the abatement cost (what it costs companies to remove or reduce any emission or pollution they may cause) for companies in the specified sectors. The abatement cost is the difference between the lifetime costs of the green technology (LEDs, efficient cooking stoves, solar heaters, etc.) and the regular, non-green technology that’s being used. The numbers are based on McKinsey’s estimate that by 2030, India’s GDP is likely to be $4 trillion (Rs 179.8 lakh crore), and its population 1.5 billion, swelling the demand for critical resources such as oil.

By 2015, India will have a system of green national accounting, which is being devised for the environment ministry by Partha Dasgupta at Cambridge University. This system will demonstrate the loss India will incur by ignoring green practices, and point out where things need to improve.

Analysts say that without an aggressive green agenda a country cannot develop. There is a growth risk, with investors evaluating cities on their green quotient. If Delhi or Mumbai perform badly on an environmental level vis-à-vis peers such as Shanghai or Brasília, investors might give India a miss. “India has to define the rule of the game, or else the geopolitical risks are going to increase. The 12th five-year plan for China has an aggressive green growth agenda. India needs a similar strategy but may have a different business model,” says Paris-based Bruno Berthon, global managing director for Accenture Sustainability Services.

According to sources close to the Indian Planning Commission, the government realises the risks, and India’s 12th Five-Year Plan, to be announced next year, will have environment, sustainability and green as its central theme. “India has a huge role in delivering solutions,” says Jairam Ramesh, minister for environment and forests. In 2009, just before the UN Climate Conference in Copenhagen, Ramesh announced that India would voluntarily reduce its carbon emission intensity by 20% to 25% by 2020. He said this was to project India as flexible, and also to give it negotiating power at global forums. But more than anything else, this announcement infused a sense of urgency in corporate India to be more energy efficient than before.

A couple of years before Vedanta, Apollo Tyres was trying to gain a foothold in European markets. But the Indian company found the going tough, as customers demanded that the products comply with stringent environmental norms, including reduced noise while driving. “All this adds to the cost and, in a hyper-competitive market, the customer is not ready to pay more. So we had to innovate and find ways to be an environment-friendly as well as a low-cost outfit,” says Satish Agarwal, chief, manufacturing, Apollo Tyres.

Apollo put its green strategy in place because it found it difficult to break into the European market. The company now exports tyres from its plants in India as well as in South Africa and Poland. And because it cannot afford separate plants for export and domestic consumption, the Indian market gets tyres that meet strict European green norms.

The company has reduced the usage of pollutant carbon black in high-performance tyres, and even collaborated with the Gas Authority of India to use waste heat to generate energy, thereby reducing the use of furnace oil at its plant in Baroda, Gujarat. In the plant at Pune, Maharashtra, the company uses bagasse as fuel. With these initiatives, the company saves Rs 20 lakh worth of furnace oil every day.

A combination of governmental and investor pressure can make even the largest company cave in. In 2007, for instance, shareholders and eco activists compelled global oil and gas giant ExxonMobil to take steps to address climate change, such as setting greenhouse gas emission targets and investing in renewable energy. In 2008, auto giant Ford was forced to unveil plans to cut its vehicles’ greenhouse gas emissions following motions by two activist shareholder groups—Interfaith Center on Corporate Responsibility, and Investor Network on Climate Risk Network.

Internationally, companies know that any action against the environment will be punished by investors and billions of dollars can be lost. In India, however, shareholders and investors alike have so far not shown the kind of activism seen abroad. Large institutional investors such as the Life Insurance Corporation of India do not flag issues of sustainability for companies in their portfolios. A. Damodaran, professor of economics and social sciences at the Indian Institute of Management, Bangalore, attributes the apathy of companies and their shareholders towards climate concerns to the fear of losing the advantage of scale economies and profits.

Companies, too, are reluctant to spend on what has so far been seen as a corporate social responsibility initiative. “Most Indian companies do not realise the cost of not going green. They are more driven by economic considerations. If there is a cost involved, they try to circumvent the issue. There is no sense of urgency yet,” says Samaresh Parida, director corporate strategy, Vodafone Essar.

Parida is responsible for aligning the India operations of the telecom player with the sustainability targets set by Vodafone internationally. He points to the difficulties he faced in following reporting processes, which often did not consider the absence of grid power and dependence on diesel to keep the networks running. “We adapted them to Indian conditions and are now working with renewable energy sources and technologies to plug leaks,” he says.
manufacturing companies are worried that the investment needed to put green systems in place could push up the price of the end product. In a price-sensitive market, any increase matters. Experts, however, say this rise is only temporary. “Our calculations show that even if a green building costs 5% or 10% more than a conventional one, the cost is recovered within five years due to savings on energy consumption,” says Ajay Mathur, director general of the Bureau of Energy Efficiency, a government body set up to promote efficient use of energy.

On company boards, sustainability finds a place on the list of topics for discussion. But insiders say it is often last on the agenda and is rarely discussed. In an environment where quarterly results and dividends save the job of a CEO, it’s difficult to push strategies with a long payback. “The green agenda has to become an integral part of corporate governance,” says Seema Arora, executive director, CII-ITC Centre of Excellence for Sustainable Development. The centre is working on a proposal with the Ministry of Corporate Affairs and the National Foundation for Corporate Governance to embed sustainability into corporate governance. “The sustainability agenda generates tradeoffs that individual departments can’t deal with. Hence, priorities have to be set and driven at the CEO and chairman level,” adds Arora.

For now, the government is trying to impose regulations to force companies to follow green and sustainable practices. India Inc. claims this is unnecessary and that voluntary efforts are more effective. “It will take time to realise that wealth creation is important but how it is created is equally important,” says Sunil Sinha, head and senior economist, Crisil, a credit rating company.

Campaigners at global environment activist network Greenpeace don’t believe companies are doing enough. “Companies follow double standards when it comes to meeting green norms. In India, legislation is not as strict as in Europe. So a company might export fully compliant products to the Europe market, but those for the domestic market might not be as environment friendly,” says Abhishek Pratap, senior campaigner, Greenpeace India. For example, he says, Zenith Computers exports products that are certified to be free of hazardous substances from its plant in Kochi, Kerala. The Goa plant, which supplies the domestic market, is not certified. Zenith, however, claims that both factories comply with the Restriction of Hazardous Substance directive.

FOR INDIA, BECOMING clean and sustainable is about energy security and access, growth, and the creation of green jobs in a variety of sectors. Without major investments in energy-efficiency measures, India’s future growth will be severely constrained by an increasing energy import bill. India imports more than 70% of its crude oil requirement. With the price of crude fluctuating wildly, going clean and efficient is the only way to satisfy demands from the industry and its 1.2 billion people, nearly 40% of whom do not have access to a reliable energy source.

Estimates by The Climate Group, a global non-profit coalition that works to accelerate a clean industrial revolution, show that India spends 45% of its export earnings on energy imports; by 2020, over 35% of India’s energy is likely to come from outside the country, making it vulnerable to external price changes. “India and China face a major risk by depending on West Asia for their fuel supply. The only way to mitigate this is for India Inc. to reduce demand, be more energy efficient and move towards non-conventional energy sources,” says Berthon.

Some companies have seen the writing on the wall and have taken steps to go green before their investors, shareholders, and government force them to do so. Though small in number, their efforts at building sustainability are becoming visible. At least 50 corporates, including Tata Sons, Godrej, ACC, Wipro, and Infosys, have started voluntary sustainability reporting based on Global Reporting Initiative (GRI) norms, a globally recognised sustainability reporting framework.

Although this reporting is not yet part of the annual report, it gives companies a more transparent character and adds to their brand reputation. “India Inc. has put in tremendous effort to go green and realises that growth cannot happen at the cost of environment,” says Adi Godrej, chairman of the Godrej Group.

For Indian companies it is not just about being ethical or responsible. They know that sooner or later, regulations will come into force, and environmental issues will affect their top and bottom lines. “Today it seems like we have time, but in the next 20 or 30 years there will be a scramble for resources and markets. Being environment friendly does not mean you have to be costly. It starts with the right design and processes. But survival might also need a financial model to work with and that is what the companies need to decipher,” says Ashok Khosla, chairman, Development Alternatives, a Delhi-based research organisation.

Tobacco and consumer goods major ITC, for example, saw the risks of ignoring the health and environmental impact of its tobacco business and morphed into one of the country’s leading companies in sustainable development. It was not so much a question of responsibility, as it was a business risk.

Wipro, a company that’s not an obvious polluter, began its sustainability exercise almost six years ago, without any external pressure. The company formed a team to study the long-term impact of environmental issues on business. “After this, Wipro acquired a leadership position in sustainable initiatives, and also created business opportunities with different products,” says Anurag Behar, chief sustainability officer, Wipro. Today, 16 Wipro campuses are Leadership in Energy and Environmental Design (LEED) certified and, in 2009-10 alone, the company saved 15 million units of electricity. The company recycles water and waste, and also runs two biogas plants to save 50 tonnes of LPG every year. All Wipro’s laptop models are Energy Star 5 certified, translating into energy savings of 10% to 12% for customers.

Multinational companies, too, are introducing their global sustainability agenda in India. German technology company SAP uses a tech product developed by SAP Labs India to measure the carbon footprint of any operation within the company. It then takes action based on the report generated. “SAP AG saved $90 million by using this product in 2009-10,” says Nitin Mukesh, programme director, SAP Labs India. SAP AG also actively encourages employees to go green, even rewarding those using electric cars. Since March this year, those employees who travel by electric car get a cash allowance of Rs 7,000 a month, as well as free charging points for the car. There are already 30 cars registered, and the company is considering installing solar panels to charge these cars.

Delhi Metro Rail Corporation scored a green point when it implemented a regenerative braking process that reduced 30% of electricity requirement on the lines. The process involves converting the heat and energy produced every time a train brakes into electricity. This is transmitted back into overhead electricity lines, from where it is used by accelerating trains. This process earned the Delhi Metro 39,000 certified emission reductions (a one tonne reduction in carbon dioxide emission fetches one CER), which it sold for Rs 1.1 crore in 2008; it earned 43,000 CERs in 2009, which it sold for Rs 1.3 crore.

United Technologies, which manufactures Otis elevators, uses a similar technology to convert the energy produced by descending elevators into power. “Green makes business sense and, as awareness about such issues increases, India will emerge as the right market,” says Zubin Irani, senior managing director (India), United Technologies.

With increased awareness about the environment and heightened activism in civil society, corporates realise that if they keep on polluting, the neighbourhood might not allow them to function or grow. Companies such as Makemytrip.com are playing upon this increased awareness. As part of a go-green initiative, the online travel and ticketing company asks customers to donate a small amount (around Rs 200) to plant trees to mitigate the carbon footprint generated by their air travel. Between November 2009 and October 2010, the company reported that it had planted 198,010 saplings in Rajasthan. A similar initiative was started by Globus, a retail company belonging to the Mumbai-based Rajan Raheja Group.

Sudipta Das, partner (climate change and sustainability services), Ernst & Young India, says that based on their growth plans, many companies are developing a carbon matrix for each process and product. “Soon we will see consumer goods and durables carrying additional carbon labels for customers too,” he adds.

But Irani says there’s a lack of consumer awareness about the savings and long-term impact of green products. Once that hurdle is crossed, volumes will pick up, economies of scale will kick in, and the green economy will grow.