Sustainability Takes ESG Path

₹5.4 LAKH CRORE. That is the amount India's premier oil and gas explorer Oil And Natural Gas Corporation (ONGC) and three public sector oil marketing companies — IOC, BPCL and HPCL — plan to invest in reducing their carbon footprint. Ironically, their mandate is to either explore or refine carbon-producing fuels — oil and gas.

The enthusiasm shown by these energy giants is not surprising. For past few years, corporate governance has been defined to a large extent by ESG (environment, social and governance), a framework that covers a set of practices organisations implement to limit the negative impact on environment, society and governance. It has also become part of strategic vision in India Inc. boardrooms, fuelled by changes in global business environment, demand from MNC customers and government's backing to climate-friendly businesses.

That's the vision. The reality is a bit different. An 'ESG preparedness survey' of 150 Indian corporates in May by Deloitte India found that while commitment to ESG principles is high, there is a significant gap in preparedness and action. The survey found that merely 27% Indian organisations feel adequately equipped to meet their ESG strategy and compliance requirements and only 15% believe their suppliers are prepared to comply with their ESG requirements.

"Organisations are grappling with evolving expectations on ESG compliance and disclosure from investors, boards, governments and consumers," says Viral Thakker, partner and sustainability leader, Deloitte India.

Global Momentum

In contrast with the starting trouble in India, in western countries, large investments have started flowing into companies creating viable business models around ESG. Asset managers globally are expected to increase their ESG-compliant assets under management (AUM) to $33.9 trillion by 2026, up from $18.4 trillion in 2021, says a recent PwC report. With projected compounded annual growth rate of 12.9%, ESG assets may account for 21.5% global AUM in less than five years. Just in U.S., ESG-compliant AUM would more than double from $4.5 trillion in 2021 to $10.5 trillion in 2026. In Europe, it would increase 53% to $19.6 trillion, says the PwC report. Asia-Pacific is likely to see the fastest growth in ESG AUM, expected to more than triple to $3.3 trillion by 2026, says the PwC analysis.

An Infosys Knowledge Institute study of 2,500 organisations across the world last year found that a 10 percentage point increase in ESG spending correlates with a one percentage point increase in profit growth. "Most companies surveyed realised positive returns from ESG efforts within a few years," Mohammed Rafee Tarafdar, chief technology officer, Infosys, tells Fortune India.

This has piqued interest of India's largest conglomerates.

India Inc. Catches Up

The leader of India Inc., the 154-year-old Tata group, is implementing 'Project Aalingana' ('embrace' in Sanskrit) with sustainability commitments from seven group companies — Tata Steel, Tata Power, Tata Motors, Jaguar Land Rover, Tata Chemicals, Tata Consultancy Services and Tata Consumer Products — which have made detailed energy transition plans till 2045. The project was launched two years ago. "In FY22, these companies accounted for 99% of the group's Scope 1 and Scope 2 emissions. They also accounted for 95% freshwater consumption and 99% solid waste of the group," says a recent Tata Group update on sustainability. Scope 1 covers greenhouse gases (GHGs) released directly while Scope 2 emissions are GHGs released from energy bought by an organisation. The Tatas adopted a Climate Change Policy in 2009. Since then, more than 50 group companies have been tasked with reducing their carbon footprint. Tata Motors plans to use only renewable electricity by 2030. Tata Power is looking to generate 40-50% electricity through non-fossil fuels by 2025. Other targets include greening of Tata-owned buildings and data centres. "The group's transition will be strengthened with sustainability, wellness and safety. It is playing out across the board with EVs, renewable energy, new materials and chemicals, among others," Tata Group Chairman N. Chandrasekaran told Fortune India in a recent interview.

The ₹7.93 lakh crore Reliance Industries (RIL), which is transitioning from oil to chemicals and green materials, is adopting global ESG standards. It is doubling its PET recycling capacity to five billion bottles a year and has developed ways to produce biodegradable and compostable plastics to replace single-use plastics. RIL, which has set a target of net zero emissions by 2035, has increased its renewable energy consumption by 352% in one year, chairman and managing director Mukesh Ambani told shareholders last year. RIL is investing ₹75,000 crore to establish a fully integrated new energy ecosystem in Jamnagar. "India's transition, as also the world's, from fossil fuels to renewables will provide Reliance an opportunity for continuous hyper-growth over decades," Ambani told shareholders.

Engineering major Larsen & Toubro is another Indian corporate major serious about ESG goals. It has set a 2040 deadline for net zero emissions. Its green businesses had a turnover of ₹38,843 crore, 38.2% of total revenues, in 2022. The company recycles 48% waste water while recycled and eco-friendly materials comprise 18% of its raw materials, says its ESG scorecard. It plans to become water neutral by 2035.

Aditya Birla Group, which has high carbon emitting businesses like Hindalco, Birla Carbon, UltraTech, Novelis and Birla Cellulose, aims to achieve net zero emissions by 2050. The share of renewable energy used by group company Grasim increased to 8% in FY23 from 5% in FY22. The company has reduced water consumption by 15% and GHG emissions by 6% since FY19.

Similarly, Sajjan Jindal's JSW Group aims to become carbon neutral by 2050. JSW Energy plans to expand solar and wind power capacities from 6.3 GW at present to 20 GW by March 2030 and is investing in wind turbine, solar panel, lithium-ion battery, green hydrogen and green ammonia projects. JSW Steel is working to replace coking coal with green hydrogen while JSW Cement has started using slag from steel plants and fly ash from thermal power stations to replace limestone.

Adani Group, which has one of the largest renewable portfolios globally with 20.4 GW, is investing over ₹75,000 crore in energy transition initiatives. The plan includes production of green hydrogen as well as an integrated wind and solar play. Adani Group, which trades polluting fuels like coal, has set aggressive goals for sustainability. Adani Green Energy was recently ranked first in Asia and among top 10 globally in renewable energy sector by ISS ESG and among world's top 10 companies in renewable energy by Sustainalytics in FY23. Vneet S. Jaain, managing director, wants to take the company to top 10 in ESG benchmarking of electric utility sector by FY25.

Also, Adani Ports & SEZ has been accorded first position in global rankings for "Transport & Logistics" sector in emerging markets by Moody's ESG Solutions. It is in top 10 out of 297 companies in Global Transportation & Transportation Infra sector in S&P Global Corp. Sustainability Assessment. Adani Transmission is planning a 70% reduction in GHG emission intensity by FY30. Adani Total Gas has initiated a plan to halve GHG emissions by 2030.

Large public sector companies such as ONGC, IOCL, NTPC, BPCL and HPCL have also announced energy transition roadmaps and plans to get into green energy. Leading PSU oil refiner and marketing company IndianOil Corporation plans to invest ₹2 lakh crore in coming years to achieve 'net zero' emissions by 2046. It plans to achieve two-third emission reduction through increased energy efficiency, electrification and fuel replacement. ONGC has set a goal of becoming a net zero carbon emission company by 2038. It's investing over ₹1 lakh crore by 2030 for transition from oil to chemicals and setting up 10 GW green energy capacity. BPCL is targeting net zero emissions by 2040 and has identified six strategic areas as pillars of future growth and sustainability. These are petrochemicals, gas, renewables, new businesses (consumer retailing), e-mobility and upstream (oil exploration). BPCL will invest ₹1.4 lakh crore in next five years to effect this transition. Similarly, HPCL is working on a plan to reach net zero emissions by 2040 and invest ₹1 lakh crore for transition to less polluting fuels. India's leading power producer NTPC, which has 50-plus coal-fired plants, is implementing 'The Brighter Plan 2032' to accelerate efforts for production of renewable energy, green ammonia and green hydrogen.

Sustainalytics, a Netherlands-headquartered company that rates sustainability of listed companies, has ranked Indian multinational UPL as the number one crop protection company in ESG performance globally. UPL is driving adoption of climate-smart farming. "The upcoming ESG opportunity is huge," says Sumant Sinha, Chairman and CEO of ReNew. The company plans to transform into a leading decarbonisation solutions specialist to tap opportunities in green hydrogen and value-added solutions like solar manufacturing, digitisation, energy storage solutions and carbon markets.

More Work Ahead

While efforts from top guns of India Inc. are laudable, compared to U.S. and Europe, India needs to bring in more regulations and mandates to ensure more companies implement ESG norms fast enough, say experts. In May 2021, Securities and Exchange Board of India made it mandatory for top 1,000 entities by market capitalisation to include a business responsibility report detailing ESG initiatives in their annual reports. "A robust ESG culture will translate into better top-line growth, cost reduction, reduced compliance burden, increased productivity, better investment quality and asset optimisation," says Viral Thakker of Deloitte India. Saurav Kumar, partner, Induslaw, says legal action is critical for sustainable development.

While Indian corporates and leading public sector companies are serious about ESG goals and technologies like carbon capture or green ammonia or green hydrogen, more push is required in supply chain and sectors where emissions are hard to abate, says Ashish Modi, president, Honeywell India. "End-user industries need to be better educated as well," he says.

Surely, sustainibility & ESG commitment needs to trickle down to corporate India, in deeds than in words and boardroom discussions.