Boardrooms need to be real about climate-aligned business

Worryingly boardrooms are still unaware of the climate crisis.

By Arunabha Ghosh

At the climate negotiations held in Glasgow, India made bold promises. Now is the time to take action. How might India’s business community respond? Ignorance or avoidance? Acceptance or ignorance? The first is a pathology to be overcome, while the second delays the inevitable. Corporate India must accept the new scenario. The Boardrooms would be well advised to focus on five priorities.

Climate risk. Businesses should have realized that climate change is more than a concern for environmentalists. It is a strategic business risk. Even for those businesses that don’t take a long-term view, 2021 showed enough evidence to show that the risks are increasing even for those who do. Extreme weather is increasing in intensity and occurs more frequently than expected, including floods in China or Europe, heatwaves across Canada, and forest fires that ravage California and Siberia. This is causing billions of dollars of damage. Additionally, the lack of adequate insurance protection against rising climate risks and non-linearities, especially in emerging economies is alarming.

Boardrooms are still largely ignorant about the climate crisis, which is worrying. NYU Stern School of Business published a paper earlier this year that examined 1188 Fortune 100 directors about their ESG (environmental. social. governance) credentials. Only three knew anything about climate change, two knew a little about water, ten about sustainable development, and 14 about energy.

India too has large industry associations that have committees on climate change and sustainable development. However, it is unlikely that the full extent or impact of climate risk is being understood or internalised. For example, consider that three quarters of India’s districts have become hotspots in extreme weather events like floods, droughts, and cyclones. Consider next findings from CEEW’s recent Climate Vulnerability Index, which shows that 463 of India’s districts (home to 968 million) are extremely vulnerable to climate change. Consider making a decision in the boardroom to invest $100 million in a new manufacturing facility. Companies will be at risk of serious damage to their investments if ESG compliance is treated as a simple check-the-box exercise and a copy-and-paste exercise from consultants.

A majority of Indian companies fall under the category of micro, small, or medium enterprises. They may not be able to comply with securities regulators’ requirements or have professional boards. Their vulnerability to climate risk is still real. Corporate strategy cannot include ignorance.

It is important to understand the transformational power of net zero. Another challenge is that even senior management and boards might not be aware of the importance of the climate crisis for their sector. Steel, cement, fertiliser and petrochemicals account for 75% of India’s industrial emissions. An exporter of garments could think that climate commitments cannot be avoided.

Except that the goal to achieve net zero emissions by 2070 requires not only energy transition, but also economic transformation. It will require rebalancing every sector. By 2070, India will need 5630 gigawatts of solar power, 1792 GW of wind power, 79% of freight trucks will have to be electric (the rest fuelled by green hydrogen), electricity’s share in industrial energy will have to jump from 16% today to 65% in 2070, and crude oil use must peak by 2050 and drop 90% during 2050-70. Every sector will be affected by changes of this magnitude.

The most important questions for the humble garment exporter will be about how cotton was grown, how much water was consumed, with what energy source it is pumped, how the bales are transported, whether the cotton yarn is spun in a machine that runs on diesel, gas-based power, rooftop renewables, or rooftop solar energy, and whether natural dyes or chemical are used. They will also need to know how wastewater is treated and reused, and what kind of energy. These are the daily struggles and travels of a tshirt in the new climate economy.

Each sector will see a gradual shift towards low-carbon development as more investment, trade, technology, and ideas flow. However, this transition will occur at different times. Businesses that take advantage of the opportunity will be first to move; others may wait until costs for clean tech fall further. Corporate strategy cannot avoid the inevitable.

How much will it cost you? It won’t be cheap. CEEW’s Centre for Energy Finance estimates that it will cost $10.1 trillion (in 2020 prices) for India to achieve net zero by 2070. However, not all of this investment will be made domestically. The gap between what is available and what can be obtained from conventional sources (banks or non-banking finance companies, debt capital markets, etc.) is estimated to be $3.5 billion. Concessional finance (for hedging expenses) will be required to bridge the gap. It is estimated that it will cost $1.4 trillion ($28.8 billion annually). As with the real economic sector, the financial sector needs to transform. This includes a shift from guidelines for a green Taxonomy to disclosure requirements regarding climate risks.

How do you spend a trillion dollars? The most important factor will be the use of public finance to de-risk three types of risks: against investment in clean tech, against extreme weather risks, and against community risks that will be faced by regions affected by a shift away from coal. This is not a matter for corporations only. Businesses and government must partner in understanding the financial, environmental and social risks—and building buffers against them.

Make the most of the opportunities. Not all costs are equal. Corporate India must be aware of at least two new areas where there are opportunities, and not just sectoral transitions. The first is an emissions trading market, which will be developed under Article 6 of Paris Agreement. The second is the many sectoral alliances or coalitions that are already forming for major technological bets. At COP-26, initiatives were launched that brought together industries from all sectors, including cement, chemicals and electronics, power, transport, shipping, and power. The UK and India launched an Industrial Deep Decarbonisation Initiative that focuses on steel, cement, and power. This columnist has recommended a global alliance for green hydrogen, which could allow Indian businesses to tap into the supply chain for a new strategic oil.

Without accountability, none of the above works. Annual climate negotiations (COPs), take place for two weeks. There are 50 weeks in a calendar year when customers, shareholders, civil society, and courts will demand that climate action be taken. It is not enough to write a small CSR check to address the climate crisis. Corporate India must be able to see the signs and align its strategies to create opportunities and shape the economy of tomorrow.

The author is CEO, Council on Energy, Environment and Water