By UK Sinha
May 2021 will be remembered for the heat it generated on companies across the world on their sustainable business practices. In a global first, a judicial court in Netherlands has invoked the principles of human rights obligations of companies to rule that the Royal Dutch Shell will have to further accelerate its targeted reduction in greenhouse gas (GHG) emission. Convinced that Exxon Mobil does not have enough focus on sustainability, an activist shareholder having only 0.02% shares was able to mobilise votes from the likes of BlackRock and Vanguard to get two board directors of its choosing appointed in spite of strong resistance from the management. The shareholders of Chevron forced upon the management a resolution to set strict emission targets from the products that it sells. The International Energy Agency recently noted in a report that if the Paris climate goals have to be achieved, all new oil and gas projects will have to stop right now. The German cabinet approved a law which requires all coal-fired plants to close down much earlier than the target date set only eighteen months ago. In India, the SEBI came out with a new set of Business Responsibility and Sustainability Reporting (BRSR) that is more detailed, quantitative and comparable than the erstwhile BRR and will be mandatory for the top 1,000 companies from the next year. The International Integrated Accounting Board, IIRC in the UK and the Sustainability Accounting Standards Board in the US formally decided to merge under the IFRS umbrella to provide internationally comparable reporting standards on sustainability.
All of this in the month of May 2021! The decades-old debate on environmental damage and sustainability is now reaching a decisive phase. There is a confluence of three sets of undercurrents which generate this optimism.
Investors’ pull: Workers saving for their pension do not want their investments to go to companies whose tailings-dam can burst and cause hundreds of death in Brazil, or that destroy an ancient site of aborigines in Australia for an extra bit of coal reserves. Investors also realise the long-term business risk of companies if sustainability isn’t a focus, and that, in the long run, financial capital is just one of the multiple capitals a successful company must possess. Questions over ‘existential threats’ and ‘purpose’ of the company are being raised in the boardrooms.
Governments’/regulators’ push: In 2021, the US announced that it will cut emissions by over 50% by 2030. Japan has almost doubled its 2030 targets. The UK has now announced a target to cut 40-45% by the same time, from the earlier goal of a 30%-cut. China has announced that its emissions will peak by 2030, and by 2060, it would have net zero emissions. India is expected by the global community to announce net zero by 2050. All of these have huge implications not only for hydrocarbon companies, but across multiple sectors, including shipping, airlines, steel, mining, financial services and others. Banking regulators are asking banks to include climate in the risk-assessment of the companies they lend to. Insurance and pension regulators are raising similar questions in their sector.
Regulators of securities market are including sustainability as crucial elements in protecting long-term interests of all stakeholders of companies. The IEA has projected in its report that, for the world to reach net zero emission by 2050, gas consumption has to decline by 50%, oil by 75% and coal by 90%. International conventions and national laws are prescribing stricter environmental targets.
Measurement/reporting: When sustainability debates picked up, a plethora of organisations like CDP, CDSB, PRI, GRI, TCFD, IMP, IIRC, SASB, etc, sprang up to fulfill the need for sustainability reporting. Often, these worked at cross purposes and in competition with each other, leading to ‘greenwashing’ and other malpractices and creating confusion in the minds of investors. But, the realisation that the investors need a set of comparable and verifiable reporting formats has gathered momentum in the past one year. The merger of SASB and IIRC within the IFRS umbrella this year is a leap-frogging in the measurement and uniform reporting of sustainability practices of companies. The last excuse to avoid focus on sustainable business practices will also wither away. The heat on the companies is only going to intensify further.
The author is Former chairman, SEBI
Views are personal