From UPSC perspective, the following things are important :
Prelims level : Not much
Mains level : Paper 3- Sustainability pressure on companies
The article discusses the three undercurrents that are pushing companies to adopt more sustainable business models.
Demand for sustainable business practices
- Companies across the world are facing pressure to adopt sustainable business practices.
- In a global first, a judicial court in the 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.
- The shareholders of Chevron forced upon the management a resolution to set strict emission targets from the products that it sells.
- The German cabinet approved a law that 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).
- BRSR will be mandatory for the top 1,000 companies from the next year.
Three factors driving the change
1) 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.
- Investors also realise the long-term business risk of companies if sustainability isn’t a focus.
2) 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.
- 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.
- When sustainability debates picked up, many 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 last excuse to avoid focus on sustainable business practices will also wither away.
Consider the question “Financial capital is just one of the multiple capitals a successful company must possess. This brings sustainability into the focus. In light of this, discuss the factors that are forcing the companies to factor in the sustainability in their business models.”
The decades-old debate on environmental damage and sustainability is now reaching a decisive phase. Companies need to factor in the sustainability aspect in their profit calculus to remain relevant in changing world.