By Arunabha Ghosh
India made bold commitments at the climate negotiations in Glasgow. Now that the talking is over, it is time for action. How might India’s business community respond? Ignorance, avoidance, or acceptance? The first is a pathology that must be overcome; the second only delays the inevitable. Corporate India must accept the changed scenario. Boardrooms would do well to work on five priorities.
Understand climate risk. This year should have convinced businesses that climate change is not merely a concern for environmentalists but a strategic business risk. Even for businesses that do not take the long view, 2021 provided enough evidence that even in the short run, the risks are mounting. From floods in China and Europe to heatwaves in Canada to forest fires in California or Siberia, extreme weather is becoming more intense and occurring with greater frequency and sooner than anticipated. This is resulting in hundreds of billions of dollars in damages. Moreover, it is the lack of adequate insurance protection against non-linear and rising climate risks, especially in emerging economies, that is worrying.
Worryingly, boardrooms remain mostly ignorant about the climate crisis. Earlier this year, a paper from NYU Stern School of Business examined 1188 Fortune 100 board directors regarding their ESG (environmental, social, governance) credentials. Only three had relevant climate change expertise, two knew something about water, 10 about sustainable development and a grand total of 14 about energy.
In India, too, whereas large industry associations have committees on climate change or sustainable development, it is unlikely that the full extent of climate risk is understood or internalised. Consider, for instance, that over the past 50 years, three-quarters of our districts have become hotspots for extreme weather events, like floods, droughts, cyclones and their compounded impacts. 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. Now consider making a boardroom decision of investing, say, $100 million for a new manufacturing plant. As long as ESG compliance is considered only a check-the-box exercise with cut-and-paste reports from consultants, companies will run the risk of extensive damage to their investment.
Moreover, the bulk of Indian businesses fall in the micro, small and medium enterprise category. They might not have professional boards or compliance obligations to securities regulators. But their vulnerability to climate risks is not any less real. Ignorance cannot be corporate strategy.
Understand how transformational net zero is. The other challenge is that even informed boards and senior management might think that the climate crisis is not relevant to their sector. Steel, cement, fertiliser and petrochemicals account for 75% of India’s industrial emissions. So, a garments exporter could be forgiven for thinking climate commitments are avoidable by their sector.
Except that the goal of net zero emissions by 2070 is a call not just for energy transition but economic transformation. It will require realigning 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. With changes at this scale, no sector will be left untouched.
For the humble garment exporter, the relevant questions will be about how cotton is grown; how much water is consumed; with what energy source is water pumped; how are the bales transported; whether the cotton yarn is spun in a mill running on diesel, gas, coal-based power or rooftop renewables; whether natural or chemical dyes are used; how the wastewater is treated and reused and with what kind of energy; and even whether the garment is made with partly recycled cloth. Such will be the travels and travails of a t-shirt in the new climate economy.
As investment, trade, technology and ideas flow towards low-carbon development, the transition in each sector will be inevitable, but at different time scales. Businesses that seize the opportunity will enjoy first-mover advantage; others might choose to wait until costs of clean tech fall more. But avoiding the inevitable altogether cannot be corporate strategy.
How much will it cost? The transition will not 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. Not all of this investment will come from domestic sources. The investment gap between what is needed and what can be derived from conventional sources (banks, non-banking financing companies, debt capital markets) is estimated to be $3.5 trillion. Bridging the gap will need concessional finance (for hedging costs) amounting to $1.4 trillion ($28 billion annually). As with the real economy, the financial sector must transform, from guidelines for a green taxonomy to disclosure requirements for climate risks that regulation must mandate.
How to spend a trillion? Most of all will be the need to use public finance for three types of de-risking: against investment risks in clean tech, against physical risks of extreme weather, and against the community risks that regions affected by a transition away from coal will encounter. This is not the concern of corporations alone. Businesses and government must partner in understanding the financial, environmental and social risks—and building buffers against them.
Leverage the opportunities. Not everything is a cost. Apart from sectoral transitions, corporate India must recognise at least two arenas in which new opportunities will emerge. The first is the emissions trading market that will develop under Article 6 of the Paris Agreement. The second are the numerous sectoral coalitions/alliances that are already emerging for major technological bets. At COP-26 initiatives were launched bringing together industries ranging from cement, chemicals, electronics, mining, power, road transport and shipping. India and the UK launched an Industrial Deep Decarbonisation Initiative, particularly focused on steel and cement. This columnist has previously recommended a global green hydrogen alliance, which could give Indian businesses a chance to plug into the supply chain for a new strategic fuel.
None of the above works without accountability. Annual climate negotiations (COPs) run for two weeks. There are 50 other weeks in a year when shareholders, customers, civil society and courts will increasingly demand climate action. Responding to the climate crisis is not the same as writing a small CSR cheque. Corporate India must see the writing on the wall and align its strategies to create and grab opportunities to shape the economy of the future.
The author is CEO, Council on Energy, Environment and Water