Reducing pollution good for profit

  • 24/02/2008

  • Business India (Mumbai)

Companies will find it makes sense to reduce pollution and adopt good governance It's a tricky question. Can industry adhere to model standards of corporate social responsibility, cut pollution levels to the minimum possible and still maximise profits? Conventional thinking would tend to say no -the costs are presumably greater than any possible benefit and corporate aims of maximising profit conflict with social goals like reducing pollution levels or implementing good governance practices. But as companies around the world find that public opinion is veering towards concern and even alarm about the consequences of industrialisation and wasteful use of natural resources, institutional mechanisms are being put in place internationally and in India that would make it profitable for companies to be socially more responsible. Institutional mechanisms aimed at large funds include an index that would grade companies that strive towards social goals, disclosure norms in tune with international practice, and lower emissions of greenhouse gases by industry. Some of these initiatives have been revealed in recent weeks and mark an important improvement in evolving norms. The initiative that is likely to be of most interest to large institutional investors is a new Standard & Poor's (s&p) esg index based on an evaluation of a company's environmental, social and governance performance. Each company is rated on these parameters in a three-step process. First, by the information available from the company in the public domain through its annual reports, Web site etc; then a further evaluation is done by seeing news reports, and what the government and ngos say, and finally direct contact with the company and their response to targeted questions. The best 50 performers from the top 500 companies by market cap are then put on the index, each company being weighted not by market cap but by an index based on its assessed performance on environmental, social and governance factors. "This is a way for companies to see their esg performance and being rated would be an incentive for them to try and be in the index," says R. Ravimohan, S&P's regional head for South Asia. Rachel Kyte, director of World Bank affiliate International Finance Corporation's environment and social development department adds, "With more and more investors keen to invest in responsible firms, we hope the index will be another attempt to ensure that good performance is rewarded in the market." The Confederation of Indian Industry (en) has also been making concerted efforts to make an impact on reducing pollution and carbon emissions. Its mission for sustainable growth and climate change headed by Jamshyd Godrej recently released a discussion paper: 'Building a low-carbon India economy'. It argues that because Indian companies are "acquiring the best climate-friendly technologies" our dependence on fossil fuels is being brought down resulting in the steady gdp growth of 8 per cent being accompanied by a less than 4 per cent growth in energy consumption. business sense The en report argues that energy intensive industries such as aluminium, fertilisers, steel, textiles and cement consume around 65 per cent of the energy used by industry. It states, "A en study on energy efficiency estimated that Indian industry has the potential to save up to 20 to 30 per cent of total energy consumption." Also globalization is forcing Indian industry to become more competitive. V. Raghuraman, principal advisor to en on energy and environoment, says, "While energy saving technologies tend to cost around 10 to 15 per cent more to build, they save money in the long term. If you think it makes good business sense, do it." More and more companies are beginning to see business sense in energy efficient technologies. The first ever carbon disclosure project (cdp) report for India in 2007, was made possible because 35 per cent of 110 companies sent a detailed questionnaire chose to respond voluntary. Many of the companies saw commercial opportunities around climate change, and were actively considering reducing carbon emissions and trading in carbon. The 315 international financial institutions who are cdp signatories manage assets worth $41 trillion. They would see a long-term advantage in investing in companies using clean technologies. Even for the agricultural consumer, it would make economic sense to buy the slightly more expensive pump if it consumes less electricity. "If we reduce power subsidies to farmers and make it mandatory to have a ratings system for agricultural pumps," says Raghuraman, "they will automatically go in for the more efficient pumps."